Are we entering a recession? Money Planet: NPR

makeover vibe
makeover vibe

Being whispered and grumbled. President face questions around it. Business leaders and investors are Already preparing So. The specter of stagnation once again raises its brutal head.

It is possible that the economy can continue without any bumps or crashes. But boom and bust cycles seem to remain an inescapable feature of capitalist economies. Some countries have done well in avoiding meltdowns. Beginning in 1991, Australia had a series of Almost 29 years without stagnation, Longest span of economic growth From any nation in modern history. That ended in 2020, when the pandemic triggered a major downturn — and Australia (briefly) succumbed to the beast.

While Australia experienced no economic recession between 1991 and 2020, the United States has experienced twice, a mild one in 2001, amid the collapse of the internet and the September 11 terrorist attacks; and catastrophic known as the Great Recession, between 2007 and 2009. Since 1854, our first year official economic datathe United States experienced 35 recessions.

The Business Cycle Dating Committee of the National Bureau of Economic Research is the official body that tracks downturns in the United States. identifier A recession is defined as a “significant decline in economic activity that spreads through the economy and lasts more than a few months.” However, she toyed with that definition when she declared that the pandemic slowdown was a recession. The pandemic recession only lasted for two months – the shortest recession in American history – but Committee says“The drop in activity was so large and so widespread throughout the economy that the downturn should be classified as a recession even if it proves to be very short.”

Despite all the talk about the US entering another recession, the unemployment rate 3.6% Still historically low, job growth still standing strongAlthough inflation Consumer expenses Still like a fire hose. However, the US economy contracted At an annual rate of 1.4 percent In the first quarter of 2022, which means we may already be well on our way to the technical definition of a recession, albeit a very small one.

Why do economies suffer recessions? The field of macroeconomics does not provide a clear answer. Economists are divided. If there was one unifying explanation, it would be basically s**t going on. But, despite the lack of consensus and the fact that every new recession seems to change basic thinking about the causes of recessions, macroeconomics still offers some important insights that can help us think about what’s happening in the economy right now.

makeover vibe

Much modern thinking about recessions begins with the Great Depression, which has a name that belies the fact that it was actually two of America’s worst recessions. Back to back (There is no official definition of depression; they are basically just really bad recessions.)

When the Great Depression hit, old school economic theory, with its gospel of ideal free markets populated by highly rational market representatives, had trouble explaining what was happening. Enter: John Maynard Keynes.

Circa 1940: English economist John Maynard Keynes (1883-1946)

Walter Stoneman / Getty Images

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For Keynes, free markets were full of flaws that could conspire to diminish the prosperity of all. One significant flaw: “our animal spirits”. Keynes postulated that people are not completely rational, especially in times of stress, panic, or great uncertainty – such as during and after the 1929 stock market crash. Instead, Keynes said, we often make investing, spending, saving and many other decisions based on our animal spirits: Our feelings, emotions, beliefs and psychological quirks.

Bad things that happen in the world can lead to a dark transformation in animal spirits. In modern parlance, you might call it “makeover vibe. “Fear and pessimism, bad feelings if you will, can become contagious. Investors, business leaders, and consumers can fall back and this causes aggregate demand to fall — the total spending on goods and services in the economy. When the economy contracts, Keynes said, it will not necessarily self-correct and fix itself. (As the classical economists believed) – and many people could lose their jobs as a result.The spending gap created by the private sector with the stimulus that created the deficit, providing the confidence needed to get the economy moving again.

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Animal spirits are hard to measure, but economists conduct regular checks by polling consumers and business to see how confident they are in the future. The idea is that what people say they think can be an important indicator of whether a recession is about to occur. The University of Michigan publishes a popular survey aimed at measuring consumer confidence. He appears That after the outbreak of the epidemic, there was a shift in the atmosphere. Animal spirits went to a dark place. When the government intervened with massive rescue packages to stabilize the economy, the mood began to improve.

But people’s mental states never fully recovered to pre-pandemic levels, and starting in April 2021, it began to turn more negative again. Even after we got vaccines and treatments, feelings got worse, in large part due to supply chain problems, global instability, the persistence of the coronavirus, and inflation. Earlier this month, the University of Michigan’s measure of consumer confidence fell to its lowest level in more than a decade. The trend in the bleakest animal spirits is one sign that stagnation is heading towards us.

Other explanations for recessions

Some economists ignore the idea of ​​animal spirits and rely on explanations of recessions that see humans more as rational actors responding to economic challenges. Unlike the Keynesians, who Trend to Finding the cause of recession in private market failures, many of these economists tend to find the cause of recession in government mismanagement of the economy.

Milton Friedman and Anna Schwartz in their book A monetary history of the United States: 1867-1960, famously argued that it was the US Federal Reserve, which pursued a great monetary policy, that ultimately caused the Great Depression. When the stock market collapsed, chaos spread through the banks, and America was plunged into a deflationary spiral, the Federal Reserve had to print money, bail out the banks, and stabilize the economy. Instead, the Federal Reserve did just the opposite. It tightened monetary policy, failed to rescue the banks, and pulled money from the market. Friedman and Schwartz argued that this made the bad situation much worse.

Today, there is a growing chorus – including The Economist Blame the Federal Reserve again for mismanaging the country’s money supply and for leading us down the path of recession. The EconomistThe same Prominent Democratic Economists, they argue that President Biden’s $1.9 trillion spending package, the US bailout, overheated an economy that was already running hot, sending the inflation rate up. “While the White House was on the gas pedal, the Fed should have been on the brakes,” the magazine wrote.

To be fair to the Federal Reserve (and the White House), it has been difficult to predict what the economy will do during the pandemic. And even more so, for decades, prominent economists yelled the wolf about inflation, claiming it was around the corner, but always failed to deliver – so it was hard to believe it would come back again.

However, by leaving the inflation genie out of the bottle, the Fed will now have to do the hard work of putting it back together again. That could mean raising interest rates to a level that causes a significant reduction in spending and triggers a recession.

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However, many economists argue that the government is not responsible for the ultimate cause of the current economic malaise. And they point to another historical source of recessions: supply-side shocks — or disruptions to business and production that often have nothing to do with decisions made by a country’s leaders. The epidemic has been a major disruption, and with issues such as COVID-related lockdowns in China Manufacturing hurts, still.

Another huge upheaval, the ramifications for energy markets, was the Russian invasion of Ukraine. according to single analysisOver the past 50 years, every time oil prices have risen 50% above trend, a recession has followed. This, unfortunately, is what America (and the rest of the world) has faced over the past few months.

So, are we heading into a recession? Dark animal spirits — or bad vibes — suggest we might be. Fed policy suggests similarly. As before, the unrest continued with the Corona virus, and the high oil prices. In short, despite falling unemployment, continued job growth, and other signs of economic health, there are warning signs that a recession is coming, if it isn’t already there.