Who wants a recession in 2024?
I don’t expect a recession to occur in the next few years, but recessions are almost impossible to predict. It’s more interesting to think about the sort of policy mistakes (were they to occur) that might lead to a recession within a few years.
One mistake would be an excessively tight money policy, which could trigger a recession in 2022 or 2023. That’s possible, but seems quite unlikely at the moment.
A slightly more likely scenario would involve excessively expansionary monetary policy, which drove wage growth to levels inconsistent with 2% inflation over the long run. To get the inflation rate back on target the Fed would then need a tight money policy, which might trigger a recession.
When people suggest that current inflation is transitory, they mean it’s likely to go away without the Fed having to drive the economy into recession. (It’s transitory alright, but why?)
Some pundits want the Fed to do enough monetary stimulus to “give workers a raise”. That’s an extremely misguided view, which would not even help workers. In the long run, real wages are determined by real factors like productivity (and perhaps monopoly power among workers.) Monetary policy is a nominal factor, and cannot artificially create persistently higher real wages. (In the short run, monetary stimulus may push up prices faster than wages, reducing real wages.)
But unstable monetary policy can hurt workers by creating an unstable business cycle. The best policy mix is a monetary policy that produces stable nominal wage gains, combined with good supply side policies to boost real wages, that is, to improve the real wage/inflation mix for a given nominal wage increase.
Almost no one wants a recession in 2024. If we get one, it will be due to the misguided policies of people trying to help workers. They would overstimulate, and by 2023 the Fed would be forced to tighten to restore inflation credibility. I don’t think that’s the most likely case; rather it’s the most likely cause of a near-term recession should a recession occur.
PS. I say “almost” no one wants a recession in 2024 because . . . well . . .
PPS. Opposing coaches need to think about the fact that Bill Belichick wants them to punt when it’s 4th and one at midfield. Giannis needs to think about the fact that Phoenix wants him to take three pointers. Progressives need to think about the fact that Trump wants the economy to overheat in 2023.
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16. July 2021 at 13:49
Given that inflation targeting, even average inflation targeting is pro-cyclical, and obvious market indications they inflation expectations are falling, why do you think too much monetary stimulus is more likely than too little?
Also, is the crowd wanting to give Americans a raise through sufficiently loose monetary policy really stupid enough to confuse nominal and real income? Maybe they are, but that isn’t my impression.
To me, the idea is to get back to full employment as quickly as possible, so that there are real, permanent wage gains that occur. I think they want to make sure we go further up up steepening SRAS curve, where both real GDP and inflation rates pick up.
16. July 2021 at 14:08
My impression is the US economy has become more “robust” to nominal GDP volatility. You look at the 2001 recession, the NGDP growth slow down is puny, the YoY rate bottomed at 2.1%. We had NGDP YoY fall to 2.4% in 2016Q2, the economy slowed, manufacturing output and some other real indicators dipped, but no layoffs like 2001, granted that 2.4% bottom was off a mean trend of less than 4% YoY, not the 5-6% late-90s trend. It makes sense that when you “stress” an economy, it becomes more resilient to further stresses. Not that I am in favor of stressing the economy because of some intuition about it, but firms/households can prepare for nominal volatility, if they expect it.
The Fed has been so impressive these last few years, particularly sticking with the Average Inflation policy thus far, you’d almost think they’ve figured it out. I’d guess if they bring the market-expected NGDP trend down in a year’s time, they probably won’t over-do it, and if they do, the economy won’t hemorrhage jobs before Fed can reverse some of the tightening.
16. July 2021 at 15:55
Michael, You said:
“Also, is the crowd wanting to give Americans a raise through sufficiently loose monetary policy really stupid enough to confuse nominal and real income?”
The biggest jump in real wages that I can recall was 1920-21, produced by tight money and severe deflation. Why do people think expansionary monetary policy raises real wages?
Justin, You said:
“granted that 2.4% bottom was off a mean trend of less than 4% YoY, not the 5-6% late-90s trend.”
That’s a really important qualification.
I tend to be optimistic, but the weird Covid economy makes me wonder if they might misread the tea leaves.
16. July 2021 at 15:58
Good post – amazing how little level-headed thinking is taking place these days. Left-leaning economists: run hot, spend money, transitory! Right-leaning: we’re on the path to Venezuela!
16. July 2021 at 16:39
Scott,
You replied:
“The biggest jump in real wages that I can recall was 1920-21, produced by tight money and severe deflation. Why do people think expansionary monetary policy raises real wages?”
Loosening monetary policy coterminously lowers real wages, of course. That’s the reason it has any real effect at all, but isn’t the issue about getting back to full employment so the economy is on a higher RGDP growth path sooner? Doesn’t that mean real higher wages sooner, ultimately?
16. July 2021 at 18:36
“good supply side policies to boost real wages” – what kind of policies would fit this description? Are there supply side policies that are good at boosting productivity growth?
I’d guess about half of the 74 million Trump voters are rooting for a 2024 recession.
17. July 2021 at 05:02
Hypothetical question. Say that the Fed had adopted 4% NGDPLT a few years ago. During the current transition out of the worst of the pandemic, would any accommodations make sense? For instance, could the Fed adjust the level target up a per cent or two to allow for easier reallocation between sectors? ie, not go from 4% to 5% NGDPLT, but just add a one-time point or two to the level target. Or perhaps allow that point or two for a year or two with an announcement that they will return to the original 4% NGDPLT over the following 5 years? Or would you just recommend that we attempt to get back to the original trend from Dec 2019 by a certain date?
Thanks!
17. July 2021 at 05:40
I am still with you and Powell—-i.e., more risk than we want but not enough to change the plan.
Who is the most likely next Fed Chair? Or, who would be the worst——of the ones that could become the Chair?—-Or the best.
I suppose most guys running for President want the other guy to screw up——or at least persuade people they have——so that makes that guy in the picture normal.
I sometimes think you randomly mention him just for me——but there are too many pro Trumpers here for that to be true.
Did I mention that one of my predictions already came true? It was pretty easy. It was “we will soon see a headline that says something like “As bad as Trump was and is , De Santis is worse”. It was Samantha Bee. Not bragging—-because I would be shocked if everyone—even you—-did not know that.
Does not make it untrue!
17. July 2021 at 05:58
re: “but recessions are almost impossible to predict”
No, Leland James Pritchard, Ph.D., Chicago Economics 1933, M.S. Statistics, Syracuse, predicted every recession since WWII (until his death in 1991).
Recessions are easy to predict. They represent a prolonged monetary policy mistake.
17. July 2021 at 05:59
re: “give workers a raise”
Here’s Why America’s Labor-Shortage Will Drive Inflation Higher
July 14, 2021
https://www.oftwominds.com/blogjuly21/labor-shortage7-21.html
17. July 2021 at 06:17
Giannis is having a great Finals, but Go Suns.
17. July 2021 at 06:45
Spencer Hall,
You wrote:
“Recessions are easy to predict. They represent a prolonged monetary policy mistake.”
Isn’t there a contradiction in that statement? It’s one thing to recognize a monetary policy mistake early on, but how can you know it will be prolonged? I see the 1987 crash as having failed to predict much actual future macroeconomic turbulence in no small part due to Greenspan’s surprising markets with a stronger than expected response.
Also, it seems that the Fed’s tight money mistakes seem to occur after real economic shocks, so are those real shocks predictable? If not, then that suggests a very limited ability to predict recessions.
17. July 2021 at 06:56
” . . . perhaps even a recession.”
“The main conclusions are:
1. Although monthly increases in the next two/three months may be ½% or above in both the inflation measures, the annual rate will not rise much, because there were similar quite large increases in the same period last year. The really bad numbers – as far as the annual rate is concerned – will come in late 2021/early 2022. They may well be in the 6% – 7% vicinity.
2. The Fed response is conjecture, but my surmise is that in the second half of 2021 they will look for excuses to do nothing. They may taper asset purchases, but that is all. However, by early next year – when most top economists realize that something has gone wrong – strong action (i.e., raising interest rates) may be taken.
3. Trend or above-trend growth of demand will persist for the next three/four quarters, not least because of the need to rebuild retail inventories. At some stage – probably in 2022 – the rate of inflation will exceed the rate of increase in broad money balances. The contraction of real money balances will cause asset price weakness, and beneath-trend growth of demand and output, perhaps even a recession.
https://mcusercontent.com/78302034f23041fbbcab0ac6d/files/6039031a-fad5-5561-c2e6-aeddf55f0e90/Special_e_mail_2107_inflation_ready_reckoner.pdf
17. July 2021 at 09:13
Michael Sandifer, Sure, macroeconomic stability can improve real wages. But a monetary policy aimed at “giving workers a raise” is certainly not one aimed at macroeconomic stability. Neither hawkish nor dovish policies are likely to help workers.
Ryan, Sure, I’ve discussed hundreds of examples in this blog and at Econlog. Things like reforming zoning laws, ending occupational licensing laws, freer trade, tax reform, school vouchers, etc.
Bill, I would not recommend raising the number higher. If anything, a lower figure might be appropriate, depending on what happens to the labor force. Basically, you want steady growth in nominal wages. Wage growth has been accelerating a bit.
Michael Rulle, You said:
“I sometimes think you randomly mention him just for me——but there are too many pro Trumpers here for that to be true.”
Not true, I only blog for you. You are all I think about when writing a post.
17. July 2021 at 12:46
I agree with Justin on robust quality of the U.S. economy–which I think is directly related to the Fed learning how to “steer the car” better during the past few decades. Duly noted are the mistakes made on rate policy 2016ish, but the more significant and dangerous mistakes were made in 2008 and 2013.
Since I’m begging for a smackdown I’ll suggest that this decade will resemble the 90’s, but with NGDP growth in the 4-5% range. Wage growth may continue to lag NGDP growth for some workers after the current conditions settle down.
I rescind my predictions if Senator Warren manages to derail Powell’s tenure and some MMT nutjob is installed in his place.
17. July 2021 at 13:37
Are there specific people you have in mind who think dovish policy will increase real wages? Perhaps I assume too much, but when I hear people talk about higher inflation associated with higher wages, I think they’re ultimately referring to more stable monetary policy, even if they don’t know exactly what that looks like or how to express it clearly. I don’t recall a time when I thought I heard someone argue that simply having a higher inflation rate, for example, would increase real wages. People like Krugman have called for a higher inflation target, but it was because he thought it would help avoid the ZLB and promote more macro stability.
17. July 2021 at 14:23
David, I mostly agree; policy is getting better. I suppose my lingering fear is due to the fact that the current supply shock makes inflation targeting a bit trickier.
Michael, No one specific, certainly not Krugman.
17. July 2021 at 15:09
Interesting. I hadn’t thought of it that way.
Thanks
18. July 2021 at 08:12
Michael Sandifer
re: “I see the 1987 crash as having failed to predict much actual future macroeconomic turbulence”
Yes, the FED covers up its “elephant tracks”
1987 was the litmus test for Central Bank stupidity (no black swan). Even Robert Prechter’s Elliott Wave International got it exactly right.
Monetary flows (volume X’s velocity), fell from 16 in AUG, to 4 in NOV (See G.6 release – debit and demand deposit turnover). [ Δ, not Δ Δ ] Note, money flows, bank debits (money actually exchanging counter-parties), turned negative during the S&L crisis.
http://monetaryflows.blogspot.com/2010/07/monetary-flows-mvt-1921-1950.html
Conterminously (3 months prior to the crash), the rate-of-change in RRs (the proxy for R-gDp), was surgically sharp, decelerating faster than in any prior period since the series was first published in January 1918. The proxy declined from 11 in JUL to (-)4 in OCT. [ Δ, not Δ Δ ]
Accompanying this sharp deceleration in the RoC for M*Vt (proxy for all transactions in American Yale Professor Irving Fisher’s truistic: “equation of exchange”, the monetary authority mis-judged macro-economic strength (like the last half of 2008), and on Sept. 4 the FOMC raised (1) the discount 1/2 percent to 6%, & (2) the policy FFR 1/2 percent to 7.25% (up from 5.875% in Jan).
Black Monday began when the target FFR was increased to 6.5% on 9/4/1987. The effective FFR began to trade above the policy rate c. 9/22/1987 (constrained by reserve demand). The effective FFR spiked on Thursday (the very first day of the reserve maintenance period).
On Sept. 30 the effective FFR spiked at 8.38%; fell to 7.30% by Oct. 7; then rose to back to 7.61% Oct 19 (Black Monday). Thus, the effective FFR spiked 36 basis points higher than the FOMC’s official target, it’s policy rate on “Black Monday”.
The shortfall in the quantity of legal reserves supplied by the FRB-NY’s trading desk (which had already dropped at a rate not exceeded at any time since the Great Depression) bottomed with the bi-weekly period ending 10/21/87. This was the trigger.
At the same time, the 30 year conventional mortgage yielded 11.26%, up from 8.49% in Jan. 87, & Moody’s 30 year AAA corporate bonds yielded 11.06% on 10/19/87, up from 9.37% in Jan. 87.
The preceding tight monetary policy (monetary policy blunder), i.e., the sharp reduction in legal reserves (mirroring the absolute decline in our means-of-payment money), had effectively forced all rates up along the yield curve in the short-run (when inflation and R-gDp were already markedly subsiding). I.e., interest is the price of loan funds, the price of money is the reciprocal of the price level.
Note: interest rates may either rise or fall during the short-run, in response to the FOMC tightening policy, depending upon the “arrow of time”, and the monetary fulcrum (the thrust of inflation).
On 10/19/87 the CBs had to scramble for reserves (too stringently supplied relative to demand) at the end of their maintenance period (bank squaring day), to support their loans-deposits (it is noteworthy that contemporaneous reserve requirements were then in effect exacerbating the shortfall & response time).
A significant number of banks, with large reserve deficiencies, tried to settle their legal reserve maintenance contractual obligations at the last moment. But the FRB-NY’s “trading desk” failed to accommodate the liquidity needs in the money market – until it was already way too late (i.e., ignored their perversely coveted interest rate transmission mechanism).
18. July 2021 at 08:18
Short-term monetary flows, proxy for real output, have now topped. That spells a drop in equities.
18. July 2021 at 08:27
When short-term money flows decelerate, while long-term money flows remain elevated, you get stagflation.
How do you solve stagflation? You drive the banks out of the savings business and simultaneously tighten monetary policy.
18. July 2021 at 08:56
Unlike you, Trump is a patriot who loves his country.
You are the one that talks about devaluing the currency. You are the one that ships hillbilly jobs abroad to a regime that is exterminating uighers, and then tells these people to “learn to program” as their programming jobs are being shipped abroad too.
You are the one that wants “open borders” to drive down the price of wages.
You are the one that supports communist thugs, like BLM and ANTIFA, who loot, rape, kill, and pillage their way around the country: “crying racism”, whenever a police officer arrests them.
You are the punk who calls yourself “progressive”, but supports silencing those with opposing views, packing the supreme court when you don’t get your way, and teaching a warped view of history called the 1619 project.
You are the arrogant fool who continues to believe that only YOU could possibly be correct, and that everyone else should simply fall in line. That type of academic hubris is not uncommon – Bentham’s will is a wonderful example. I do wonder how many people are “inspired” when they see his nasty stuffed body, or his logically inconsistent writings.
I’m pretty confident Trump would love to see the economy turn around; especially since he spent four years trying to right a ship that has been adrift for thirty five years.
You, and your crony Fed personnel, however, is quite a different story.
18. July 2021 at 09:10
ankh, You said:
“especially since he spent four years trying to right a ship”
LOL. Trump presided over by far the worst GDP growth of any president in almost 100 years.
18. July 2021 at 09:36
What does it actually mean to be a progressive today?
Does it mean open borders, because that is a very good way to drive down wages and create instability within communities. We’ve seen this play out in Europe.
Does it mean that Republicans and other political opposition are a “national security threat”, as stated by a former DHS official on CNN? That doesn’t seem very “democratic”.
Does it mean looting, rioting, and burning down cities?
Does it mean wearing a black face mask, and attacking people who protest? Does it mean spray painting buildings with graffiti that reads “cops are pigs”, “ANTIFA is everywhere”, and “fuck fascists”?
Does it mean drug dens, and the legalization of hard drugs that destroy people’s lives?
Does it mean the silencing of speech, and forcing people to leave campus, canceling speeches through “pressure and coercion”, and creating “safe spaces” where people of a certain skin color are prohibited from entering?
Are these the new “progressive values”.
60 years ago progressivism was about equality of opportunity. Today, it seems to be about equality of outcome, the destruction of the individual, the family, and the community. It seems to be in favor of some consolidated techno-state borne out of Orwell’s 1984.
The “progressives” are now the “reactionary’s” who are opposed to any view different from their own.
18. July 2021 at 10:17
Progressivism is dying before our eyes, because lunatics took overtook the party. Socialism and Communism, and segregation, is not “progressive”. It’s backward.
From Denmark, to Greece and France, Europe is pretty tired of progressive tyrants in government.
And quite frankly, I don’t think their administrations will survive much longer. Hundreds of thousands are on the street in France protesting as I write.
USA is on the verge of a civil war, and much of Asia is trying to deal with the CCP tyrant.
Scary times. And it’s all the result of bad progressive policies over 100 years.
18. July 2021 at 10:19
Harry, You said:
“Does it mean drug dens, and the legalization of hard drugs that destroy people’s lives?
Does it mean the silencing of speech, and forcing people to leave campus, canceling speeches through “pressure and coercion”, and creating “safe spaces” where people of a certain skin color are prohibited from entering?”
How about conservatism? Does it mean freedom?
18. July 2021 at 14:06
@ankh I didn’t realize there were people who were such lunatics.
First of all Scott Summers is many things but a progressive is not one of them. If you equate anyone opposing Trump, for valid reasons, for Stalin and the worst of the left, you are part of the problem with discourse today.
And if you gave a shit about the Uighurs, you would support a looser immigration policy. Just saying. And you should learn to code. It isnt hard. Why should the rest of us subsidize, with our taxpayer dollars, your inefficient, wasteful, and useless career?
18. July 2021 at 21:03
For that matter, why should we subsidize expensive hospital treatments fpr Covid-19 for those unwilling to be vaccinated?
19. July 2021 at 04:36
Ivermectin is not an expensive hospital treatment…..
19. July 2021 at 06:20
You should not just focus on me -:). So try not to do that—-.
I did care about your views on potential good or bad new Fed Chairs—-policy types more than the actual person per se.
I also predict you will someday say that DeSantis is worse than Trump——although, I know you cannot stand the current left. So I do wonder why you keep Trumping us. It’s not even funny—-or annoying—-just boring.
I would have enjoyed a photo of a laughing Harris or a confused Biden. Aren’t they nominally “in charge”?
19. July 2021 at 06:32
To Michael Sandifer
I might agree with your point on hospital subsidies——but for completely different reasons I am sure.
But why subsidize people who are overweight? Or who do not go to doctors for check-ups on some prescribed authorized government plan? Or those who do not get flu shots. Or those who exceed speed limit? Or those who cross against the light? Or those who did not study hard in school to learn these proper behaviors? Or those who stress out due to overwork? Or those to do engage in relaxation techniques?
Like many—-the most important thing by a factor of 100 to people like you—-appears to be “Covid”. And you always seem to like “force” as the best method.
19. July 2021 at 07:03
Michael,
That’s a horrifying and vicious question to ask in a modern society–and it’s been on my mind as well. I know I’m a bad person because I also resent subsidizing Federal flood insurance for rich people who build houses on the edge of the ocean.
19. July 2021 at 08:43
SS: “One mistake would be an excessively tight money policy, which could trigger a recession in 2022 or 2023.” – I like the use of the word “could”, a wise word, given money is largely neutral and the Fed has as much influence as an ant does at the head of a log floating downstream. The ant may think it’s steering the log but the current is doing all the work.
19. July 2021 at 10:57
I would prefer a free market healthcare system, but especially given the system we have, I favor taxes on high fat, high sugar foods, higher alcohol taxes, etc. We already penalize dangerous driving.
I’m fine with penalizing refusals to get vaccinated. Perhaps we can add a tax that can only be avoided with a vaccine passport.
19. July 2021 at 13:31
The US is already in recession. Because the formula (Income + change in debt = aggregate demand).
19. July 2021 at 13:33
– The US is already in recession. Because the formula (Income + change in debt = aggregate demand) already tells us that “Aggregate Demand” is already shrinking.
20. July 2021 at 04:39
“Slowdown! Bank Lending Slows Since Fed 2020 Intervention And The Rise Of Reverse Repos (Inflation And Bubble Fears)” ?
https://confoundedinterest.net/2021/07/17/slowdown-bank-lending-slows-since-fed-2020-intervention-and-the-rise-of-reverse-repos-inflation-and-bubble-fears/
20. July 2021 at 19:46
Bucks champs!
Congrats, Scott!
20. July 2021 at 20:50
Yes, yes, yes! With 50!
21. July 2021 at 05:06
postkey: the bank’s have largely stopped buying:
Treasury and Agency Securities: Mortgage-Backed Securities (MBS), All Commercial Banks
2021-01-01 2587.2585
2021-02-01 2641.1822
2021-03-01 2694.4579
2021-04-01 2739.4229
2021-05-01 2786.0177
2021-06-01 2796.1925
But the FED is still purchasing bonds at a rate of $120 billion a month
21. July 2021 at 05:23
re: ““Aggregate Demand” is already shrinking”
Greenspan and Powell disavowed monetarism. To quote John Gurley, “Money is a veil, but when the veil flutters, real-output sputters.”
Both R-gDp and inflation are products of money flows, volume times transaction’s velocity. Nothing’s changed in > 100 years.
The FED’s got the wrong targets. It should target bank debits to deposit accounts. Money is the measure of liquidity; the yardstick by which the liquidity of all other assets is measured.
You wonder how Fed Chairman, Greenspan and Powell, could be so stupid.
21. July 2021 at 08:08
The football analogy is so awful.
Teams punt on fourth and one at the 50 yard line, because they can win better field position – assuming the punter and defense does a good job; and also, because one yard is not so easy. The RB has to get four-to-five yards, to pickup the one yard, because he starts about 4-to-5 yards back of the line of scrimmage. Not to mention, with 8 rushing the QB, the QB doesn’t have much time to locate a receiver, especially if that receiver is “bumped” at the line of scrimmage. Punting is the smart decision! It has nothing to do with “mind games”.
21. July 2021 at 08:15
The reason Bill used to keep his offense on the field for fourth and one, at around the 50 yard line, is because he had Tom Brady as his QB.
He also had gronkowski drawing double teams on every play, which opened a lot of slant routes for quick passes over the middle.
22. July 2021 at 11:33
Nick, All the analytics show you are wrong.
24. July 2021 at 12:45
Re Dr. Scott Sumner’s Friedman citations: “Question number one, what would Milton Friedman say about the current spike in the M2 money supply?”
With Powell saying: “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”
“Scott Sumner on What Milton Friedman Would Think of Monetary Policy Today”
Beckworth has to be really, really, ignorant to ask such a question, just like Greenspan or Powell.
Powell “When you and I studied economics a million years ago M2 and monetary aggregates seemed to have a relationship to economic growth,” Powell said, referring to one main measure of the money in public hands. “Right now … M2 … does not really have important implications. It is something we have to unlearn I guess.”
Link: The Debit and Demand Deposit Turnover Release
https://fraser.stlouisfed.org/files/docs/releases/g6comm/g6_19961023.pdf
Non-transaction deposits have very little turnover. 95:5 at best
” This change means that savings deposits have had a similar regulatory definition and the same liquidity characteristics as the transaction accounts reported as “Other checkable deposits” on the H.6 statistical release since the change to Regulation D. Consequently, today’s H.6 statistical release combines release items “Savings deposits” and “Other checkable deposits” retroactively back to May 2020 and includes the resulting sum, reported as “Other liquid deposits,” in the M1 monetary aggregate. This action increases the M1 monetary aggregate significantly while leaving the M2 monetary aggregate unchanged.”
And that combination, savings deposits and other checkable deposits is right. But then m2 now becomes m1.
That is why Dr. Philip George wrote; “The Riddle of Money Finally Solved”.
Link: The case against commercial bank saving accounts
Leland James Pritchard 1964 Banker’s magazine
The economics of the commercial bank : savings-investment process in the United States
Leland James Pritchard 1969
See: “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.
“Profit or Loss from Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386