Once again, Wall Street is obsessing over a decline in the Fed’s assumptions about GDP growth and rising unemployment in the new year as confirmation that a potentially savage recession is on the horizon. Nobody wants to live through another 2008 crash.
But is one really coming? Jay Powell actually seemed a little hurt in the press conference when they asked him if 0.5% growth next year would qualify as a recession at all. He agreed it would feel slower than usual. He balked at even calling it a “stall.”
We’ve survived plenty of seasons of roughly 0.5% GDP growth just in the last decade: late 2012, the summer of 2013, a full-fledged quarter of negative growth in the cold winter of 2014, and then again in late 2016 and the end of 2018.
It took a lot more than that to crash the market. Only 2018 triggered anything more serious than a correction . . . and even in 2014, no formal recession was ever called.
Powell is one of those people who see a recession as multiple quarters of real GDP contraction. He just doesn’t see that happening in 2023. If anything, the closest we’ve come to that kind of recession was the first half of this year, when inflation jumped above the growth rate to make the post-COVID fever feel like a chill.
If we squeak through next year with 0.5% real growth, it will mean growth is back above inflation. The Fed sees economic activity stepping up by about 3.6% in nominal terms, which is a lot of hustle and a lot of heat.
That heat was actually the Fed’s problem this year. Inflation trended 0.3% above what Powell and company hoped to see over the last three months because the economy expanded 0.6% faster than they projected.
The bus is not stalled. It just isn’t responding as the Fed keeps slamming the brake. And that’s Powell’s fear factor. He wants to kill the fire on the bus and then get back on the road.
That means getting the job market under control. The Fed hasn’t seen mass layoffs anywhere near the scale it would take to fill all the vacancies and stop people demanding much higher wages to stay where they are. None of us have.
What we’ve seen so far has been much more like the dot-com bust, which eliminated a net 2 million jobs between 2001 and 2003 . . . some of them extremely well compensated. That was a grind, but it was nothing like the 2008 crash.
And all those three grinding years did to the job market was eliminate the excesses of the 2000 boom, effectively putting the job market where it was at the end of 1999. That doesn’t feel like disaster, does it?
The Fed thought we’d see 3.8% unemployment by now. Their goal is to get it up to 4% in the long run and probably edge up to 4.6% to 4.7% in the next few years. Not disastrous numbers.
These unemployment targets translate to a job market as tight as it was in the mid-’60s . . . or 1998, when the tech revolution was just getting underway . . or 2006-7 . . . or 2016-17. Very few eras in our lifetime have seen lower persistent unemployment before triggering some kind of economic shock.
If the Fed can get what it wants, the next few years might feel a little slower. Some people in Silicon Valley and elsewhere will need to find other employment. But there’s little hint of a 2008-style crash in these numbers.
And if the numbers change fast, the Fed will change fast as well. Odds are very good inflation will evaporate overnight. We’ll go back to facing deflation risks.
You’ve seen the Fed respond to economic implosions on that scale. That’s the COVID lockdowns. It’s a return to zero-rate conditions. When that happens, the world doesn’t really feel all that good. We don’t want that, do we?