We Are Not Currently In A Recession — Why, Then, Do 58% Of Americans Believe We Are?
Word on the street is that we are in a recession — a recent poll of Americans found that a massive 58% think that the country is currently in one. With rocketing prices, political unease, cratering asset markets, and global geopolitical tensions not seen since the end of the Cold War, it’s not hard to see why people think this. Indeed, for reasons outlined below, the current situation we find ourselves in will, for many people, actually be much more difficult than the GFC was for them in 2008.
The difference, however, is that while 2008 was without doubt a bona fide recession, the current economic malaise — at least per the traditional metrics — is likely not actually a recession at all.
As per the NBER, typically seen as the authority in declaring recessions, a recession is defined as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”. While the proclamation of a recession is something of a grey area, and comes down to their somewhat subjective decision, this “decline in economic activity” includes a variety of metrics, and is mainly characterised by a declining GDP, and an increase in unemployment.
While we have seen a decline in GDP already this year — Q1 of this year saw a 1.6% annualised decline — the OECD in June predicted that US GDP growth will hit 2.5% in 2022, and the unemployment figures have actually gone down. Indeed, for the fourth month running, the unemployment rate, at 3.6%, was just 0.1% away from being the lowest number recorded since 1969.
So, if these two integral parts of the recession calculus are pointing to the likelihood that we are not, in fact, in the middle of a recession, why then do so many people seem to think that we are?
Inflation
The big culprit here is inflation. Inflation, when goods cost more, in nominal terms, from one period to the next, is generally seen by economists as a good thing — that is, when it’s maintained at a low and stable level. Indeed, major central banks such as the Federal Reserve, the Bank of England, and the European Central Bank have inflation targets enshrined by law which they must work towards — 2% in the case of all three of these institutions.
However, when inflation gets out of hand, it becomes an extremely deleterious force in an economy. Money is essentially a claim on goods and services in an economy. Inflation erodes the purchasing power of money, which means that for any given dollar a person has in their possession to spend, they can get less goods than they would have got in the previous period. For those who have cash or bank account savings, those living on a fixed income, or those whose wages don’t keep up with the pace of inflation, the effects become apparent extremely quickly — these individuals become worse off in terms of what they can afford to buy with their money.
At a current annual rate of 9.1%, inflation is well outside the targeted level by the Federal Reserve, and certain everyday goods have far outpaced even this figure — US gasoline prices increased 48.7% in the 12 months ending May according to the Bureau of Labor Statistics, rents rose 15% over the same period, and the food at home index increased by 12%. We haven’t seen this inflation show up in wages though unfortunately, what with a wage increase over the period of just 3.4%.
The issue with inflation is that almost everyone is personally affected. No matter how wealthy or poor you are, seeing prices go up means you are able to buy less with your money. Contrast this to the Great Recession of 2008, where unemployment went from roughly 5% to about 10% at its nadir.
This was undoubtedly a very disquieting time — firms were far more unlikely to hand employees raises or bonuses that they may otherwise have been given, and individuals would have found it much harder to find a job. Overall though, it was only about 5% of people who actually lost their jobs as a result of the crisis. While that is an incredibly large figure on a macro scale, on an individual level, just one in twenty people saw such a direct affront to their living standards because of it. Today however, as inflation affects almost everyone directly, the figure will be a lot closer to 100%.
Market Crashes
Swathes of economists and market commentators have been screaming for inflation for a while now, largely because of the seismic amount of money creation that has been brought about by central banks since the Great Recession. The logic seems intuitive — more money being created means more money chasing fewer goods, resulting in higher prices being bid for those goods, and so ensues inflation.
In a way, those predicting inflation have been correct — inflation has occurred consistently over the past decade. However, it it has only occurred in a certain class of goods; financial assets.
When the Federal Reserve creates money, it’s only able to do it through a select few avenues — the main ones being the purchasing of government bonds and other financial assets, and the reducing of the Federal Funds Rate, making capital extremely cheap for those who want it. These activities led to an explosion in asset prices over the past decade plus, which led to sky-high valuations, and which took on unprecedented forms in the past few years — most prominently in guises such as SPAC’s, cryptocurrencies, and NFTs.
Unlike consumer price inflation, this type of inflation does not directly engender mass hysteria or political pressure. Indeed, it is generally seen as a good thing, especially for those holding the assets. Unfortunately, it was not to last.
In response to the consumer price inflation, the Fed has had to raise interest rates. Higher interest rates serve to reduce demand, and they also make most financial assets less attractive. These assets have come crashing back down to earth as a result.
An important aspect of this asset crash is the amount of retail investors who have held financial securities. Retail participation levels in financial assets were at unprecedented levels, and this — in addition to the typical news brouhaha that always follows a decline in financial markets — has undoubtedly contributed further to the image that we are in recession. In a country as financialized as the US, where investing is often treated akin to a sport, and where many people have a personal say as to which vehicles their pension savings go into, it is even more front-of-mind than for many other countries. A lowering of the prices of asset values leads to a reverse of the “wealth effect”, and asset losses have been shown to be disproportionately painful versus the pleasure gained from an equivalent gain. It is not surprising, then, for people hearing all the doom and gloom surrounding the falling of asset markets, as well as seeing their own stakes in it reducing materially, to come to the conclusion that the economy must actually be in a much worse state than it might in reality be.
Geopolitical Outlook
Not since the end of the Cold War has the Western world faced such a nail-biting moment in time than that which we are seeing at the moment. We are looking at a war in Ukraine which some, including prominent geopolitical commentator Peter Zeihan, believe is destined to eventually end up in Poland — i.e. Nato territory — and who knows what awaits us if that comes to pass. Potentially worse again would be if China chose to invade Taiwan, which the US has vowed to defend. We are seeing a deglobalisation trend on a scale not seen since, well, globalisation itself started to take root, with particular focus on supply chains and the re-locating of manufacturing capacity. There is a left/right divide in many of the world’s largest economies — so strong is the one in the US that many think it could spill into a de facto civil war, and inequality is becoming ever more popularised as a theme
So is it any wonder, given these trends, that the median American thinks we are currently in a recession? They’re seeing their living standard go down, any investments they may have had go down with it, and the current political environment would make Ron Burgundy want to turn off the news.
The overall economic situation may not be as bad currently as it was during the Great Recession. But for the average Joe or Jane, it is in most cases actually worse. This is not to say that we are not going to enter a recession in the near future — indeed, were upcoming GDP figures, due to be released on July 28, to show a declining GDP for the second quarter in a row, we would meet the definition for a “technical recession” (two consecutive quarters of declining GDP), and we have also recently seen the inversion of the US Treasury yield curve, one of the most prominent and reliable indicators for recessions that we have.
However, whatever the likelihood of us hitting a recession in the future, with unemployment as low as it currently is, and with businesses and consumers being unusually flush with cash, it seems quite likely that we are not, in fact, in one at the current moment in time.
