President Biden is the last optimist standing.
Fed Chair Jerome Powell made clear this week that a recession won’t stop the Fed from hiking interest rates as high as necessary to crank down inflation. He even sounded like he’s eager for a recession.
After Powell testified before Congress on June 22, Fed whisperers explained that Powell was using fightin’ words uncharacteristic of his usually genteel approach. He said a recession caused by the Fed’s own monetary tightening remains a “possibility.” A soft landing, with higher rates but a still-healthy economy, would be “very challenging” to achieve. And Powell said the Fed’s fight against inflation was “unconditional,” meaning nothing will stand in its way.
Analysts who parse Powell’s every utterance drilled into that word, “unconditional,” which is new to his anti-inflation lexicon. Wall Street firm Evercore ISI explained that this indicates Powell and the Fed plan to hike interest rates with abandon, consequences be damned. The firm now sees a major risk of the Fed “oversteering and causing recession.”
You will now be hearing about the looming recession everywhere you look. The New York Times ran a helpful story on June 24 explaining what a recession is and when the next one is going to start, which everybody will now be wondering. On the same day—maybe it’s Recession Day!—the Wall Street Journal warned that many economies are slowing and recession odds are rising. Democratic economist Larry Summers, one of the few who predicted the inflation surge that now dogs the Biden presidency, said the only way the Fed can get inflation down is to push unemployment way, way up.
Politico is most eager to get this recession started. “Recession is coming!” it reported on June 22. “Take it to the bank.” If you have any money left, that is.
Poor Biden. The unemployment rate remains near a record low and there are still twice as many job openings as there are unemployed Americans. Biden wanly tells the country “recession is not inevitable,” like a pilot telling passengers on a burning plane that it could still land safely. A miraculous rescue is always possible. Deus ex machina.
A recession seems inevitable, to the doomsayers, because the economy is clearly slowing and the Fed needs to slow it a lot more to get inflation well below the current level of 8.6%. GDP growth in the first quarter of 2022 was actually negative, largely because of a fresh COVID surge early in the year that forced a lot of people back into their bunkers. Economists expect a rebound in GDP in the second quarter, but those estimates have been falling, and it’s possible we could have negative GDP growth for two quarters in a row. That’s the old definition of a recession.
The new and more subtle definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Like, you know it when you see it. So if inflation stays high, unemployment goes up, spending drops, hiring flatlines, and stocks tank even more, sure, it could be a recession.
'Recession fears overdone'
Not everybody is cheering this on. “Recession fears overdone,” Capital Economics declared in a June 23 research note. “The surge in interest rates, plunge in the stock market and weakness of consumer confidence have fueled fears of an impending recession, but there is still little sign of that in the incoming economic data.” Many economists agree, with the main bullish indicator being a U.S. labor market that may be the hottest of any major economy.
Biden has no choice but to keep talking up the economy. He has hit the right tone on inflation, saying repeatedly that he understands how it hurts ordinary working Americans. But he also says he’s optimistic about the future, likely recalling Jimmy Carter’s disastrous “crisis of confidence” speech from 1979, which made Carter an unrelectable grump-in-chief.
For the time being, Biden’s cheerleading is unlikely to sway gloomy voters, who seem likely to overturn Democratic control of at least one chamber of Congress in the November midterm elections. A bigger question may be whether gloomy Americans can actually self-recess, causing an economic bust simply because they believe it’s going to happen. The answer, to some degree, is yes. Psychology is very important in a free-market economy, and if workers think they might lose their jobs in the near future, they rein in spending and make other moves that actually make a recession more likely.
Biden might be better off if the recession started today, or three months ago, and we simply spent the rest of 2022 getting it out of the way. That would bring a recovery in 2023 and 2024 as Biden tries to persuade voters to elect him or another Democrat in the 2024 presidential race. Alas, Biden doesn’t really get to decide what happens to the economy. He only gets to tell us how he sees it.