Fortune Magazine has come up with the most interesting reasons for a looming recession in a recent edition.
“Here are six reasons why a recession remains Bloomberg Economics’ base case. They range from the wiring of the human brain and the mechanics of monetary policy, to strikes, higher oil prices and a looming credit squeeze — not to mention the end of Taylor Swift’s concert tour.”
I’m not sure just what the wiring of the human brain has to do with recessions, other than Nobelist Robert Shiller’s research on human behavior; that most financial decisions are based on hearsay, rumors, and plain old irrational exuberance.
The housing bubble was caused by such behavior. Professor Shiller has written about it in successive editions of his book, Irrational Exuberance. And former Fed Chair Greenspan first brought such behavior to the world’s attention before the 2000 Dot-com recession.
Fortune Magazine should add blockbuster movies like Barbie and Oppenheimer, if they want to attribute our current economic health to happy consumers enjoying leisure activities; but their current temperament could change with bad news.
Oil prices are falling, the strikes have been settled with employees winning bigtime with better benefits, and the current credit squeeze hasn’t hurt current record employment and consumer spending to date per below graph (gray bars are recessions).
Federal Reserve Governors have also been sounding more dovish on interest rate policy of late.
“The question of when it will be appropriate to begin dialing back the policy restraint” was clearly “a discussion for us at our meeting today,” Powell said at his last press conference of this year. The Fed is “likely at or near the peak rate for this cycle.”
That leaves what Bloomberg believes is the major determinant of a possible recession; the “looming credit squeeze” due to the continuation of higher inflation and interest rates. So, we don’t yet know the full effect of the sudden hike in interest rates engineered by the Fed since March 2022, some 18 months ago that has made borrowing more expensive.
But consumers seem to act rationally when it affects their pocketbooks, especially from too high prices and interest rates. Their record spending on leisure activities could change if the Fed doesn’t begin to lower interest rates in the spring, as I said.
The so-called Fed Funds rate has been at its high point of 5.25 to 5.50 percent from August 2023, just five months, whereas Greenspan’s Fed held rates at their maximum for eight months, from August 2006 to June 2007. The Great Recession was determined to have begun in December 2007.
So there isn’t much room left to avoid a recession, is there? Watch the actual behavior of interest rates to know what consumers will do next!
Harlan Green © 2023
Harlan Green on Twitter: https://twitter.com/HarlanGreen
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