Existing Home Sale courtesy of Trading Economics
Misplaced recession debate
Housing construction leads to recessions and recoveries. What’s on the way?
Much of the “recession” debate is misplaced. I believe a recession started in May and a negative GDP third quarter is on the horizon.
Some believe a third quarter of slowing growth will portend a recession that started in the first quarter.
I associate the recession with a fall in retail sales and a major collapse in housing construction, both of which began in May.
It does not matter. What matters is the shape of the economy in the future. And a fourth quarter of negative growth wouldn’t surprise me in the slightest.
History of bubbles blown by the Fed
The Fed has burst three consecutive massive bubbles: the dot-com bubble, the housing bubble, and what is now widely referred to as the everything bubble.
In any case, the Fed burst ever-larger asset bubbles. The wealth effect stimulated spending and borrowing.
Low interest rates have once again fueled a massive real estate bubble.
After the dot-com crash, the Fed burst the real estate bubble. After the housing crash and the Great Recession, the Fed launched the everything bubble.
The everything bubble culminated in unprecedented pandemic stimulus, QE and absurdly low interest rates.
Effects of deglobalization
Deglobalization is underway. One important impact is higher inflation.
The Fed is no longer feeling the winds of globalization pushing prices down. Inflationary aspects of globalization blow stiffly in his face.
That’s another reason not to expect the Fed to come to the rescue with QE and lower rates any time soon.
For discussion, please see De-Globalization: New supply chains are inefficient and will drive inflation
What now?
Expect a long period of weak growth
It’s the payback period for three consecutive bubbles. Expect a long period of weak growth, no matter what it’s called.
There will be no bailouts this time. Nor will the Fed reverse interest rates quickly for fear of fueling further inflation and unwanted demand.
Barring house prices crashing, the housing sector is likely to be weak for a long time as the Fed is unable or unwilling to offer much support.
Real estate tends to start and end recessions. But where is housing headed if prices remain high, along with mortgage rates in excess of 5 percent?
A fortunes crash in general is likely. If this is the case, the impact of the wealth effect on spending rates will be huge.
What about jobs?
- The Covid recession was very short, two months, not even a full quarter of declining growth. The pandemic has also been accompanied by the largest job losses in history.
- I expect the opposite of the Covid recession: a long period of weak growth accompanied by relatively high unemployment figures.
I’ve heard countless times over the past six months that jobs are too strong for a recession.
Such talk is nonsense.
We can easily see three or four quarters of negative GDP with relatively strong jobs because we never fully recovered the losses from the pandemic.
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Employment levels in retirement age groups
Age 60+ Employment
- In 2022: 22.09 million
- 2008: 13.46 million
- 1999: 8.22 million
- 1981: 7.21 million
There are over 22 million people aged 60 and over who are still working. We’ve never seen anything like this before, so don’t expect previous recessions to be a model for this one.
Millions of these people will retire. Employment can fall significantly as these boomers and Gen Xers retire, but falling employment and rising unemployment are not the same thing.
Calling BS for the second time in a row, amazing jobs report, and I understand why
On August 5th I commented on the Second Straight Amazing Jobs Report with the comment “I’m Calling BS” and “Understanding Why”.
While I expect jobs (particularly unemployment) to be strong in this recession, the numbers don’t add up.
Synopsis Since March
- Employment -168,000
- Jobs +1,680,000
That’s a bit much and I smell revisions or wild data swings one way or another.
Another possibility is to overcount jobs while undercounting retirements. In January, 22 million people of retirement age were still working.
Fed’s hands are tied
The jobs data speak for themselves. That’s half the Fed mandate. If employment (unemployment) is relatively strong, as I expect, the Fed will be halfway through its mandate.
The Fed’s other mandate is price stability. Everyone on the planet knows the Fed failed. It gets the grade F.
The Fed doesn’t want another F. It will play it safe unless there’s a credit event or a huge spike in unemployment.
De-globalisation, asset bubbles and fears of inflation mean that the Fed is reluctant to make cuts. Higher interest rates and high house prices will not stimulate this important cyclical aspect of the economy.
Cyclical components of GDP, the main chart in macro
If you missed it, please pay attention to the cyclical components of GDP, the most important chart in macro
My follow-up article was A Big Housing Bust is the Key to Understanding This Recession
Housing construction drives recessions and recoveries, and house prices remain weak for a long time.
Add it all up and you have the opposite of the Covid recession, a long period of economic weakness with minimal rises in unemployment.
It doesn’t matter if you call this a recession or not. Also, the NBER might not announce the recession until it’s over. This has happened before.
This post is from MishTalk.Com
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