Recessioncore
Recessioncore
Is the United States going to be in a recession?
The biggest economic question of 2022 has been “will there be a recession”. I’ve gone over it in two parts before, and the answer appears to be “maybe”. On the one hand, all the data says there isn’t going to be a recession, but on the other, interest rates have gone up a lot - meaning there could be one in the future. But this is obviously not a satisfactory answer to anything, so let’s get into it.
Recession primer
How do recessions happen? Enter Paul Krugman. Imagine a babysitting co-op that exchanges coupons for, well, babysitting. Normally, people would spend their coupons, and try to earn them back later - so services would usually balance out. If there were too few coupons, for whatever reason, then people would try to save them for truly special occasions, and to hoard however many were available. Because it’s a small co-op, each one assumes everyone is doing the same, and the whole co-p falls apart. This shortage would result in too few people “buying” the babysitting services, and in too many “unemployed” babysitters, who’d want to perform the service but wouldn’t be in demand due to fear of future “unemployment” on their end.
In real life, we call this a recession, and it happens when there’s too little money going around, which results in people spending less of it and hoarding more of it, with the obvious consequence that businesses suffer and may have to lay off workers, so the fear (or reality) of being laid off causes further spending cuts by consumers. Ultimately vibes play a key role here: most of the time, there isn’t some big cut to supply (like COVID or an oil shock) that results in a recession, but one to demand - meaning that a recession, which is a demand shortfall, is usually caused by the very demand shortfall that it produces. Besides being very Baudrilliardian, this makes perfect sense.
The point here is that, if you assume people are rational, then they can tell when the economy is doing badly - meaning that, if the economy’s vibes get bad, then people act on them, and the economy actually does get bad. This is a problem because the economy is not a self-balancing system, so there either needs to be a “balancer”, or it just lets her rip (which is bad - source: Depression, The Great). Keynes advocated for this to be fiscal policy (i.e. government spending), but nowadays it’s usually monetary policy - quoting Krugman, again:
… the Federal Reserve Board actively manages interest rates, pushing them down when it thinks employment is too low and raising them when it thinks the economy is overheating. You may quarrel with the Fed chairman's judgment (…) but you can hardly dispute his power. Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.
Why is Jay Powell scaring the hoes?
Thus, the important question is what does the Fed want here? Their stated goal is a soft landing, which is a decline in the inflation rate without a recession. They have also said that they expect unemployment to increase by about a point (say, from 3.4%, the latest value, to 4.4%) which, as many have pointed out, has never happened without a recession1, and unemployment has never increased by just a point.
The reason why the Fed might want to engineer a recession is pretty simple: they think that the labor market is running too hot, which means that wages run too high, which means that inflation is above target (2% a year). Their key indicator isn’t unemployment, which is messy because of labor participation, or employment, because it’s silly to expect too many people being employed being bad for the economy - if they’re getting hired, it’s to do something, and in the aggregate (which is what matters for macroeconomic phenomena) that balances out, inflation-wise. The Fed is looking at job vacancies, aka how many job postings have been posted, and their relationship to unemployment.
Instead of the (unfairly) maligned Phillips Curve, they’re looking at something called the Beveridge Curve, which posits a negative relationship between unemployment and job vacancies - the logic here is that a “high pressure” job market has low unemployment and high vacancies, and vice versa, and wages move along those lines because it implies employers or employees intensely competing with each other. The problem here is that job vacancies are a terrible measurement for anything. And also, previous episodes of high vacancies to unemployment didn’t coincide with inflation anyways, mostly because both are terrible indicators that measure labor market conditions terribly. So the Fed is talking nonsense when they use this kind of thing as an indicator for how robust the labor market is, or as a guide to hike up rates.
There’s also the problem that wage growth can be slowed down without an increase to unemployment - obviously if inflation expectations go down (but expectations, at least long term market ones, haven’t been a problem recently), but also if job switiching goes down without a net decrease of employment. So slowing nominal income growth without it turning negative is what you want to see, and it’s also what we are seeing - perhaps rates need to go up a little bit, but not enough for a recession anyways2. Especially importantly, price growth was around the 2% mark for the second half of 2022, meaning that the Fed’s approach probably worked anyways. Plus, the things the Fed said were signs of a soft landing (lower core inflation, lower housing inflation, lower goods inflation) all happened as well:
But there is a fundamental problem here, which is that the labor market trails output - so if there is going to be a recession, variables measuring output (construction, manufacturing production, retail sales, etc) are going to be doing really badly before the labor market starts going under. And looking at real output variables, there doesn’t seme to be a problem either - the data the NBER Business Cycle Dating Committee looks at to decide if there’s a recession going on is all doing fine.
However, a real concern is that the impact of monetary policy on real output is lagged, and therefore the current rate hikes haven't affected economic activity yet.
https://twitter.com/IvanWerning/status/1620875857912008705?t=5ePBJ8zFC_228oLNrgNfEA&s=19
Macroeconomic vibe check
The data we have now says that everything is okay, that there isn’t going to be a recession, and that inflation is going to go back down peacefully. So why are we worried? Because everyone is worried. What?!
A very common term among Gen Z types is “vibes”, which is more or less the impression something gives off. When something has “good vibes” it means it’s good, and if it has “bad vibes” it means it comes off badly. What’s the relevance? As fellow blogger/content creator/friend of Joey Politano Kyla Scanlon has pointed out on her blog, there’s a vibecession going on, where everyone feels like there’s a recession coming but the economy itself seems quite strong.
The Fed acts as the vibe mediator of the economy - a lot of their actual tools are just setting the vibes for what they’ll do next. The Great Depression, for instance, ended when FDR told Congress to tell the Fed to get off the gold standard - which would have allowed them to have any actual control over the vibes. And Japan (the subject of both of Krugman’s pieces) has had a pretty long economic slump caused by the Bank of Japan simply setting up vibes that are too bad.
The same is true for inflation, by the way: if people don’t think the Fed has inflation under control (or cares about getting it under control at all in the first place), then they simply decide to take the matter into their own hands and beat inflation by raising prices more than everyone else, which results in higher and higher inflation rates forever. For this, the Fed has to chill out the vibe and say they’ll do something about it, or do it, and maybe this means a pretty nasty recession.
Reality appears to be falling apart, to be fair - to quote journalist John Ganz quoting his friend, “It feels like the whole country has taken LSD.” One of the most memorable lines of the 1999 movie Matrix was “welcome to the desert of the real”, spoken by the character Morpheus. This line borrows from Jean Baudrillard’s 1981 book “Simulacra and Simulation”, about how developments in media (from images, to print, to newspapers and magazines, and then mass visual media like film and tv) had caused reality itself to deteriorate and then disappear. This follows Guy Debord’s 1967 “The Society of Spectacle", about how mass visual media destroyed genuine social interaction because of Marxism, and Walter Benjamin’s 1936 “The Work of Art in the Age of Mechanical Reproduction”, which states that mass visual media destroyed self expression for weird convoluted reasons - and also led to fascism, because it turned politics into another form of entertainment (sort of).
This is just to say, it seems that vibes do matter - what is reality if not the shared vibes for society, anyways. But economists tend to dismiss “the vibes” in their (our? I have a degree now) work, and I think that’s a mistake. There is a pretty clear connection between “the Fed thinks the economy should be in a recession” and the economy actually being in a recession, but the Fed only says that kind of thing if it wants people to think it wants that kind of thing, but the markets interpret it as if the Fed doesn’t actually want a recession and is just scaring the hoes into bringing prices down. It’s corecore all the way down.
Conclusion
Of course, the question remains: is a recession necessary to bring down inflation? No. Are interest rate hikes still necessary? Yes. By how much? I don’t know. But the Fed should stop scaring the hoes and be clearer with what they’re going to do with the economy, and especially stop looking at stupid indicators and drawing dumb conclusions from them.
As for Europe and the UK, tough luck, you'll have a recession because of Putin. Not much to do not gonna lie.
To be fair it actually did happen in April 1980, but that was only because there was going to be another recession about a year later
Unrelated to much of this but the big problem for the labor market in recessions is lower hiring, and not so much mass layoffs.