Americans brace for a recession

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According to a long-standing economic theory, the mere expectation of an acceleration in inflation will lead to an acceleration in actual inflation. The idea here is that if consumers expect the prices of goods and services to rise rapidly in the near future, they will buy earlier, faster, and in bulk, causing those prices to rise faster than they wouldn’t otherwise. That makes sense, but can the same be said of a recession? Of course, and it can happen now and in real time.

If people are worried about the economy getting worse, they will cut back on spending, switch to cheaper brands, postpone consumption, and save in general. The net effect if enough people take such action would be a recession. And guess what? The portion of the University of Michigan’s latest monthly consumer sentiment index that shows whether people say it’s a good time to buy a major household item has fallen to a record low in data dating back to 1980. the same applies to the purchase of a vehicle. Buying a home is only marginally better, falling only to its lowest level since 1982.

America could be heading into a recession despite having one of the hottest job markets in history, with two open positions for every available worker!

There is usually a definable turning point for an economy, a single event or catalyst that triggers a recession. In 2008, it was the bankruptcy of Lehman Brothers Holdings Inc. The collapse of a huge Wall Street bank caused a drop in consumption almost immediately. It wasn’t until 2013 that consumers became convinced that the recession was over. Of course, the stock market had recovered in those years, and the job and housing markets had recovered, but people still had doubts, which resulted in the slowest recovery after all. major downturn ever recorded.

Now we can look back to a government report from June 10 showing that the consumer price index rose 8.6% in May from a year earlier as the turning point of this economy. Since then, the Federal Reserve Bank of Atlanta’s widely followed GDPNow index, which aims to track the economy in real time, turned negative for the second quarter, hitting its lowest point since the early days of the pandemic. pandemic and lockdowns in 2020.

An economy is an infinitely complex system, made up of billions of decisions that people make every day. People are very discerning when it comes to economics. If they detect any increased possibility that they will lose their job, their income or even not receive a raise, they will reduce their consumption. This is done in a subtle way. For example, when the pandemic subsided and people left their homes, it was impossible to get a reservation at a local restaurant. Now it’s not that hard because more and more people seem to be making the same decision that eating out at a restaurant is increasingly out of reach for many. The latest CPI report showed that the cost of full-service meals has risen faster than headline inflation.

What makes the current economic situation so interesting is that people generally lose confidence when there are job losses, and not before. This time around, the labor market is stronger than ever, with an unemployment rate of a miniscule 3.6%. And yet, people are discouraged.

Economists were trained to disregard “soft” economic data such as sentiment surveys because it was always better to look at what consumers actually do – the “hard” data – and not what they say . Right now, the hard data says we’re not in a recession, but I suspect those stats are going to get worse sooner rather than later. Much of the economy is based on sentiment, and the past few months have seen a massive destruction of confidence.

If people believe there is going to be a recession, there is nothing anyone can do to make them believe otherwise. I mean, you can’t just ask them to cheer them up. Sure, the Federal Reserve could cut interest rates, but now would be the worst possible time to make such a move and it just won’t happen. If it is true that inflation is always and everywhere a psychological phenomenon, so is recession.

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

Jared Dillian is the editor and publisher of Daily Dirtnap. Investment strategist at Mauldin Economics, he is the author of “All the Evil of This World”. He may have an interest in the areas he writes about.

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