A couple years ago I wrote that the future looked positive. Turns out, it did, but not for very long. There were significant improvements in many areas. Unfortunately, inflation has tempered the benefits and now looks to be the reason (excuse?) to slam doors closed.
I took the stance that inflation was transitory. I thought it would be six months or so of higher than normal inflation and then things would return to normal. I still maintain that inflation is not entrenched nor is it actually even the result of normal economic processes. I believe we are seeing inflation at high rates due to an abnormal economic environment.
The main reason for the high inflation, in my view, is still distortions in economy from the pandemic. That is, supply chains are messed up due to lack of workers, lack of raw materials, lockdowns in China, and so on. Distortions exist because of changes in behavior due to changed preferences (people staying home more), working situations (remote work), and make up activities–all due, again, to covid. These changes are likely to be persistent and businesses and supply chains have yet to catch up. Finally, government spending, especially in the form of stimulus payments, played a role since people had money to spend.
Individually, and over time, these shifts would likely not result in substantial inflation. Taken together, and over a relatively short period of time, they resulted in higher inflation that is sticking around longer than expected only because Economics as a school of thought really has little idea of how the economy actually works.
The Federal Reserve is now attempting to react to inflation and is likely going to go overboard. Not because it actually needs to in order to control inflation–most signals point to inflation falling–but because it has a credibility problem. So, we are likely to see a recession soon and I doubt it will be small. Why? Every other central bank is doing the same thing. Massive amounts of support are being removed from all economies simultaneously. That is going to lead to some real pain globally, and the results will reverberate through the various economies.
So, what should we expect in the US? Certainly job losses. Businesses seem to be holding on to workers at the moment, but that will not last. I do not expect deep unemployment on par with the Great Recession or 1987, but there will be unemployment. Because of significantly restricted immigration, lower birth rates, retirements, and various other factors, we are looking at a worker shortage for the foreseeable future–about 10 years–so I do not think unemployment will last long.
Unfortunately, unemployment hurts everyone, especially those in the lower socio-economic parts of society. The pain will be acutely felt by them and certainly by others. Worker gains will be lost and progress toward a more equitable society will be halted, if not backslide. It will take some time for the economy to cool sufficiently for the Fed to change direction and in the meantime, the employment slump will do its damage. Couple that with the damage from the pandemic and we will continue to lose ground in progress toward a better society.
The concern I have is more around the damage to the rest of the world. Most economies cannot weather a global downturn like that US and other advanced economies. Less advanced economies will suffer and that will impact the US and Europe. I expect China’s economic bubble to pop, or at least deflate significantly, in the next year. That will hurt the global economy as well, which, again, will impact the US. Many businesses are diversifying their supply chains away from China, but that can only happen so fast–it takes a few years to really do that–so expect that to cause some pain.
In other words, the global economy is, well, global. It is far more interconnected that it was even 10 years ago. I expect the recession will be relatively mild in the US if it can be managed well, but there is no guarantee that it will be. How often does the Fed “get it right?” Not often. It typically overshoots or undershoots. We are seeing that again now.
Ultimately, my expectation is a relatively mild recession in the US with muddling growth over the next couple years while the rest of the world works through their economic woes. Then we should see a lift new businesses as the US and world adjust to new preferences and new technologies. We should start to see new medicines, technologies, and products come out that are a response to the pandemic-caused shifts around the world. This all assumes, of course, that Russia doesn’t drag the world into a nuclear exchange and radical politicians don’t overthrow their governments (I’m looking at you Republicans).