Chris Kuehl
Managing Director • Armada
Here we are again. The people who are supposed to know what is going on are not very helpful. There are all the standard economist jokes for times like this. “Put five economists in a room and get five different opinions (six if one is from Harvard)”. Why is it so hard to get a straight answer to such simple questions? Is there going to be a recession or not? Is the Fed going to raise rates again and by how much? Is inflation getting worse and what is causing it to remain so high? I would love to be the one to provide those simple answers but alas – I have the same issues that others of my ilk face. The best I can do is provide some clarity around why these are so hard to answer and what motivates many economists in their attempt to answer.
First off there are the “gloom and doom” guys who will point out every dark cloud they can while opining that the mother of all recessions will happen in 2030 or 2035 or 2050 and so on. Two things are really going on here. The first is that these are really not predictions as much as they are warnings. They are basically asserting that if threats are not dealt with in a timely manner there will be problems (debt, inflation, worker shortage, training etc.) but there is still time to avert the disaster if action is taken. The second motivation for the gloomy forecast is more prosaic. If one predicts a really bleak future and the reality is not all that bad, people will be too happy to criticize the messenger. If one predicts good times and it gets worse there is a strong desire to shoot that messenger.
The next question is why it is so hard to make definitive statements. Recessions should be pretty simple – they are defined as two consecutive quarters of negative GDP numbers. In reality that doesn’t really tell us very much. The US is a huge economy – a GDP of over $30 trillion is predicted for the year 2026. China may hit about $24 trillion and then it really drops off (Japan at $5.4 trillion, Germany at $5.3 trillion, India at $5.0 trillion). Even in the midst of a national recession there will be large sectors of the economy that will feel no decline at all. These sectors keep expanding and keep hiring and show no signs of recession. Beyond these sector differences there are issues regarding the cause of a downturn. Was this because of a sharp decline in exports (as in Q2 of 2022) or was this a result of some viral attack nobody was prepared for (Covid in 2020) or a collapse in the banking sector that rested in hubris and bad assumptions (2008). Ultimately the best forecast is one that pinpoints where the damage will be most likely and what sectors will escape.
What about calling inflation? Why is it so hard to determine whether prices will rise or fall? It starts with what motivates those price hikes in the first place. At the start of 2022 inflation began its real surge (although it had started to creep up in 2021 as people emerged from the pandemic). The issue then was a collapsed supply chain and a surge in commodity prices as nobody seemed prepared for the rapid recovery of consumer demand. As these issues faded the wage issue became the driver. This is called the wage-price spiral. As prices go up, those with some control over their wages demand more and that forces the supplier/producer to keep hiking and this triggers more wage demands. That is what we are seeing now and that kind of inflation is very hard to bring under control. Then there is the most frustrating kind of inflation – “greed- flation”. This is when some companies elect to take advantage of the situation and jack up prices whether they really need to or not.
What will the powers that be do about all this? What can they do? The issue of inflation lies primarily in the hands of the central bank (Federal Reserve in the US). To stimulate an economy the Fed can lower the Fed Funds rate and otherwise encourage banks to lend. When inflation is the issue, the rates are hiked to force banks to slow down. It is a brutal tactic and depends on a whole range of factors. The Fed has a dual mandate – stimulate and control. Doing something for one mission is usually detrimental to the other. Congress and the Executive play smaller roles but they are long-term influences. If inflation is the issue, it doesn’t help when Congress passes massive budgets and puts even more cash in the pockets of consumers. On the other hand, these outlays can bolster growth. It all becomes a matter of timing. Growth was the prime concern in 2020 but inflation control is the issue in 2023.
