Recession forecasts are piling up. Do not panic.


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Wall Street’s focus seems to have shifted in recent days, from how fast and to what level the Federal Reserve will raise interest rates when the next recession hits. The two are not mutually exclusive. The consensus is that the Fed is so behind that curve when it comes to raising rates that it will have no choice but to tighten monetary policy so severely that it will force the economy to contract to control inflation. The problem with such forecasts is that they read like a page from the pre-pandemic playbook.

Recession chatter has been building for the past few weeks, but really picked up on Easter Sunday, when Goldman Sachs Group Inc.’s chief economist, Jan Hatzius, released a report putting the odds of a recession at around 35% over the next two years. He noted that 11 out of 14 tightening cycles in the United States since World War II have been followed by a recession within two years.

It’s hard to argue with history, but if the last two years have taught us anything, it’s that the economy and financial markets are in uncharted territory after the US government injected billions of dollars in support budget and that the Fed injected billions of dollars into the financial system. . And it’s clear that analysts have struggled to adapt the old models to the new order, making the predictions little more than guesses. Data compiled by Bloomberg shows that until the middle of last year, economists were predicting inflation was likely to hover around 2.5% for 2022 despite the consumer price index already above 5% at the start of the year. ‘era. The CPI has since jumped to over 8%.

Where economists seem to have missed the boat the most is with consumers, whose spending accounts for about two-thirds of the economy. What differentiates this period from others is the relatively strong financial situation of the average household. Any discussion of inflation and its negative effects on the economy and consumers must begin with excess savings. The generous social programs instituted by the US government to support the economy during the Covid-19 pandemic have allowed consumers to build up an incredibly large cash cushion. Check deposits for households and nonprofits rose to $4.06 trillion in December from $1.16 trillion at the end of 2019, according to the Fed. The previous high for this measure before the pandemic was $1.41 trillion.

Even though these special government programs have ended, that doesn’t mean the largesse hasn’t continued. Reimbursements from U.S. taxpayers are rising, averaging $3,175 this year, up 9.9% from the same period in 2021, according to data compiled by Bloomberg. Payments can improve consumer mood. The University of Michigan said Thursday its preliminary sentiment index for April rose unexpectedly, the most jump since the start of 2021. On the same day, the Commerce Department said retail sales for March among a control group were little changed, falling just 0.1%, while the February number was revised up to minus 0.9% from the originally reported negative 1.2%.

In their conference calls over the past few days to discuss first-quarter results, JPMorgan Chase & Co. CEO Jamie Dimon and Bank of America Corp. CEO Brian Moynihan underscored consumers’ strong position on this issue. moment. Dimon noted how healthy consumer spending remains, and Moynihan explained that consumers are sitting on a lot of cash, presaging more spending to come.

It’s not like consumer finances are strained. The household debt service ratio has been near its lowest level since the start of the pandemic, remaining comfortably below 10% and far from the record high of 13.2% in 2007 as we approach the last recession. Such low leverage gave consumers the confidence to take on more short-term debt. In fact, the Fed said earlier this month that consumer borrowing rose the highest on record in February, jumping $41.8 billion from the previous month. History shows that credit booms during good times, when consumers feel confident, rather than when times are tough.

Lost in Hatzius’ forecast of a 35% probability of a recession over the next two years, he is quite optimistic in the short term, projecting the odds of a recession over the next 12 months at just 15%. That’s less than the 25% average in a Bloomberg monthly survey of economists, which itself is consistent with the long-term average of 23% dating back to 2008.

The Fed faces an almost impossible task of controlling inflation without seriously damaging the economy. It is almost impossible to project the economy two years ahead in normal times, let alone emerge from a pandemic accompanied by an unprecedented stimulus. Of course, many headwinds will weigh on growth, but there are also many tailwinds. Maybe the great baseball player Yogi Berra said it well when he said “it’s hard to make predictions, especially about the future”.

More other writers at Bloomberg Opinion:

• The slower the Fed, the harder the landing: Bill Dudley

• Consumers are moving towards higher tariffs: Jonathan Levin

• This is what long-term inflation looks like: Allison Schrager

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Robert Burgess is the editor of Bloomberg Opinion. He is the former global financial markets editor for Bloomberg News. As editor, he led the company’s news coverage of credit markets during the global financial crisis.

More stories like this are available at bloomberg.com/opinion

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