Misplaced debate on the recession
Housing leads recessions and recoveries. What’s on the way?
Much of the “recession” debate is misspaced. I believe a recession started in May and a third quarter of negative GDP is on the way.
Some believe that a declining third quarter of growth will mean a recession that started in the first quarter.
I associate the recession with a drop in retail sales and a big housing bust that both started in May.
It does not matter. What matters is the shape of the economy in the future. And a fourth quarter of negative growth wouldn’t surprise me in the least.
History of Fed-Blown Bubbles
The Fed burst three massive bubbles in a row: the DotCom bubble, the housing bubble, and what is now widely referred to as the everything bubble.
In each case, the Fed blew bigger and bigger asset bubbles. The wealth effect stimulated spending and borrowing.
Low interest rates again fueled a huge housing bubble.
In the wake of the DotCom crash, the Fed burst the housing bubble. In the wake of the housing crash and the Great Recession, the Fed launched the world bubble.
The bubble of everything culminated with an unprecedented pandemic stimulus, QE and absurdly low interest rates.
Impact of de-globalization
De-globalization is underway. One of the main ramifications is higher inflation.
The Fed no longer has the wind of globalization at its back, which is driving prices down. It has the inflationary aspects of globalization blowing violently in its face.
This is another reason not to expect the Fed to come to the rescue soon with QE and lower rates.
For discussion, please consider de-globalization: new supply chains are inefficient and will drive up inflation
Expect a long period of low growth
It’s time to collect three consecutive bubbles. Expect a long period of low growth no matter how labeled.
This time there will be no bailout. The Fed will also not quickly reverse its interest rate policy for fear of further stimulating inflation and unwanted demand.
Unless real estate asset prices collapse, the housing sector will remain weak for a long time, with the Fed unable or unwilling to offer much help.
Housing tends to trigger and end recessions. But where does housing go if prices remain high with mortgage rates over 5%?
A general asset crash is likely. If so, the impact of the wealth effect on spending rates will be enormous.
What about jobs?
- The Covid recession was very short, two months, not even a full quarter of declining growth. The pandemic has also been accompanied by the biggest job losses in history.
- I expect the opposite of the Covid recession: a long period of weak growth accompanied by relatively high unemployment figures.
Countless times over the past six months I have heard that jobs are too strong for a recession.
Such talk is absurd.
We can easily see three or four quarters of negative GDP with relatively strong jobs because we never fully recouped the losses from the pandemic.
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Employment levels in retirement age groups
60 years and over Employment
- In 2022: 22.09 million
- In 2008: 13.46 million
- In 1999: 8.22 million
- In 1981: 7.21 million
There are more than 22 million people aged 60 or over who are still working. We’ve never seen anything like this before, so don’t expect previous recessions to be a model for this one.
Millions of these people will retire. Employment may drop dramatically when these baby boomers and Gen X employees retire, but falling employment and rising unemployment are not the same thing.
Calling BS for Second Consecutive Amazing Jobs Report, Understand Why
On August 5, I commented on Calling BS in the second consecutive Amazing Jobs report, Understanding Why
While I expect employment (specifically unemployment) to be solid during this recession, the numbers are not budging.
Synopsis since March
- Employment -168,000
- Jobs +1,680,000
It’s a bit too much and I sense some wild data revisions or fluctuations somehow coming.
Another possibility is to overestimate jobs while underestimating retirements. In January, 22 million people of retirement age were still working.
The Fed’s hands are tied
The employment data speaks for itself. That’s half the Fed’s mandate. If employment (unemployment) is relatively strong as I expect, the Fed will be halfway through its mandate.
The Fed’s other mandate is price stability. Everyone on the planet knows the Fed has failed. He gets an F grade.
The Fed does not want another F rating. It will err on the side of caution unless there is a credit event or a huge increase in unemployment.
De-globalization, asset bubbles and fear of inflation add to the Fed’s reluctance to cut. Higher rates and high house prices will not stimulate this important cyclical aspect of the economy.
Cyclical components of GDP, the most important graph of the macro
If you missed it, please note Cyclical Components of GDP, the most important macro chart
My follow-up article was A Big Housing Bust is the Key to Understanding This Recession
Housing drives recessions and recoveries and housing rates stay low for a long time.
Add it all up and you have the opposite of the Covid recession, a long period of economic weakness with a minimal increase in unemployment.
It doesn’t matter whether you call it a recession or not. Furthermore, the NBER might not even announce the recession until it is over. It’s already happened once.
This post is from MishTalk.Com
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