Wherever you get your news, there’s no escaping the perception that rising prices are breaking the US economy. Recession is almost a foregone conclusion on the Bloomberg terminal, which aggregates 150,000 news sources with every bulletin categorized and counted. Headlines with the word “inflation,” increased 345% to 186,000 times a month since the beginning of 2020, while “strong economy” declined 48% to 1,766 times monthly.
That’s understandable amid a stock market rout and when so many prominent commentators, including former Treasury Secretary Lawrence Summers and former Goldman Sachs chief executive Lloyd Blankfein, have predicted resurgent inflation and now say recession is increasingly likely. They’re not impressed that US gross domestic product has rebounded from the Covid-19 shock at the fastest pace in modern times, overtaking its pre-pandemic high of $21.4 trillion. Nor are they relieved by the fact that the Federal Reserve’s preferred measure of prices, the Personal Consumption Expenditure Core Price Index, is nowhere near replicating the runaway scourge of the 1970s despite rising the most this year since 1983.
Yet prophecies of imminent stagflation are drowning out a countervailing consensus among savvy economists, who see the US growing through 2024 as inflation subsides to a third of its current 8.3% rate.
Seventy-seven economists contributing to Bloomberg predict that US GDP will outperform the Group of Seven developed nations during the next three years. All 56 economists who provide quarterly forecasts not only see steady growth over seven consecutive quarters but also the absence of a contraction. The US unemployment rate, which has recently improved the most in its history by falling to 3.6% — almost the lowest level in five decades — from a 2020 high of 14.7% is poised to reach 3.5% in the third quarter and remain low for several years. That would make the US the second-lowest in joblessness among the G-7 nations after Japan, according 50 economist forecasts compiled by Bloomberg.
Additionally, the economists put the probability of a recession at 30%, up from 15% at the end of January but not historically remarkable.
Recession Forecast: Partly Cloudy
Weighted average of economists’ estimates of US recession probability
Source: Bloomberg
To be sure, no one knows how and when two of the biggest contributors to inflation — supply chain disruptions and commodities shortages aggravated by China’s economy-pinching Covid Zero strategy and Russia’s war in Ukraine — will end.
Other assumptions obscure why economists are sticking with their forecasts. When the difference in yield between 10-year and 2-year Treasury securities turned negative in March, commentators immediately predicted recession because all six downturns since 1980 came after a negative or inverted yield curve. The same commentators were largely silent when the yield curve turned positive earlier this month by more than 0.2 percentage point.
At the same time, inflation-mongering took a respite when the Consumer Price Index dropped to 8.3% last month from 8.5% in March while the Fed’s preferred PCE inflation gauge fell to 5.18% from 5.31%. The median forecast of 69 economists puts the CPI at an average of 7% this year before it declines to 3% in 2023 and 2.4% in 2024.
Good Expectations
Actual and predicted growth and inflation forecasts of economist panel
Source: Bloomberg
The risk of recession is surely real, but so is the absence of several historical red flags. The US deficit-to-GDP ratio had declined to 4.9% in April from 18.6% in March 2021, only 0.1 percentage point wider than the pre-pandemic level and 1.6 percentage points wider than the average over five decades, according to data compiled by Bloomberg. The Bloomberg Dollar Spot Index, which tracks the performance of 10 major currencies versus the U.S. dollar, appreciated to a level that is 14% higher than the average since 2015 when the index began.
For all the anxiety about financial markets, US borrowing costs — including federal, state and local governments as well as American companies — are the lowest since 1975, when such data became available, according to the Bloomberg US Aggregate Bond Index. Even after yields climbed 2 percentage points from the low, debt financing still is 2.8 percentage points lower than the 47-year average of 6.3%.
“We’ve had a sustained period of very, very low interest rates,” said Dan Ivascyn, managing director and group chief investment officer for Pacific Investment Management, the bond-investing giant with $2.2 trillion of assets. “Households are in a very good position, so there’s an inherent cushion in the economy that could create much more resiliency in the face of rising rates,” he said in an interview at Pimco’s Newport Beach, California headquarters last month.
Only a year ago, the twin southern California ports of Los Angeles and Long Beach, which account for almost 40% of imported US goods, were struggling with unprecedented global supply chain disruptions caused by the pandemic. The worst of the crisis had abated by the second half of 2021, which saw record activity that appears likely to continue.
“I think we’re going to supersede last year,” said Mario Cordero, executive director of the Port of Long Beach, during an interview last month in California.
So what explains the clash between conventional economic wisdom and current economic data?
Bloomberg Chief Economist Tom Orlik and his colleague Anna Wong, Bloomberg’s US economist, share their peers’ equanimity about inflation and growth. They attribute the optimism-pessimism gap to a lack of experience with anything comparable in recent memory.
“You really have to go back to the Spanish Flu in 1918 or Bubonic Plague in the Middle Ages,” for a perspective that informs the current situation, Wong said.
Orlik put it this way: “There’s no kind of historical relationship of anything in the historical data which tells you how Russia invading Ukraine is going to impact. You can’t really look to history for lessons on how China’s lockdowns in response to omicron are going to impact.”
As a result, he said, “It’s always more interesting to talk about the risk scenario, especially when the risk scenario is kind of sexy like a recession, rather than a base case of everything being OK.”
Source: Bloomberg
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