This week’s mystery: will there be a recession?
The Federal Reserve raises interest rates as quickly as possible to fight inflation. Many economists believe that higher rates will cool the economy so that a recession will become inevitable.
Fed officials pushed back, saying a recession is not baked in the cake.
Who is right ? Well, so far it’s a mystery.
See: The United States gains 315,000 jobs in August. The labor market remains solid but shows signs of slowing down.
The economy was quite weak in the first half of this year.
For now, economists expect growth to pick up in the second half as Americans enjoyed a free summer of vacations, weddings and family reunions as the coronavirus pandemic, for many, in the rearview mirror.
Lily: The US economy is not in a recession – yet
Rajeev Dhawan, director of the Center for Economic Forecasting at Georgia State University’s Robinson College of Business, thinks the economy could falter once the umbrellas are put away and kids return to school.
“We are going to slow down. We are slowing down,” Dhawan said in an interview.
Consumers will cut spending after splurging this summer and business travel will not take over, he said.
Joseph Gagnon, a former Fed staffer and senior fellow at the Peterson Institute for International Economics, sees a “50-50 chance” of a recession.
With inflation so high, the Fed needs to slow growth and increase unemployment to fight it.
See: Inflation falls for the first time in more than two years, according to a key indicator in the United States
“If they don’t get it right, you’re going to have a recession,” Gagnon said.
Darwin worries that the Fed is pushing interest rates too high.
Much is said about the likelihood of a “mild” recession, but Dhawan is worried.
Often, recessions start out as mild and “then the bottom drops,” he noted.
Lily: Economist predicts recession ‘whopper’
Fed officials say there is an increased risk of a recession, but that is not their base case.
In his Jackson Hole speech last week, Fed Chairman Jerome Powell said tackling inflation will likely require a sustained period of sub-2% growth.
Recessions are, by their very nature, unpredictable because they are “random shocks,” Gagnon said.
Models meant to predict recessions “don’t have a ton of power to be able to predict a recession,” St. Louis Fed President James Bullard told The Wall Street Journal earlier this month.
Wall Street economists tend to be reluctant to predict recessions for self-preservation reasons.
“On Wall Street, if you forecast a recession that doesn’t come, you could lose your job,” said Robert Brusca, chief economist at FAO Economics.
On the other hand, Wall Street can be very lenient if a recession comes and you didn’t plan for it, he added.
The key data to watch will be whether inflation is reducing corporate profits, Brusca said.
If companies find that inflation is eating away at their profits and start laying off workers. This could lead households to reduce their spending.
See also: America has entered a real estate recession, say builders and brokers.
At MarketWatch, we cover economic data so our readers know where the economy is heading so they can play their careers and look after their financial health.
We find that there are “known unknowns” about the outlook which, once clarified by the data, can completely alter expectations about the economy. For example, not so long ago, economists predicted US economic growth at an annual rate of 5% this year and called it another “crazy year”.
In this periodic column, we’ll dig into these key mysteries facing the US economy, telling you everything that’s known and some of what isn’t. We’ll try to keep track of when the data confirms or changes conventional wisdom.