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We Should Just Accept We’re Going to Have a Blah Economy


This economy cannot go on forever. GDP may still be growing, but it’s anemic. And other indicators are mounting that suggest a recession is imminent: the yield curve is inverting, growth in hiring and home prices is slowing, and Philadelphia could win the World Series.

If you follow the financial commentary, it sounds like we are close to the tipping point – the moment when the economy turns and we enter a recession; stock markets plummet, inflation eases, people lose their jobs, and house prices plummet. But if one thing has been consistently true over the past two years, it’s that what everyone has always predicted has turned out to be wrong. That’s because we’re in uncharted territory. We have never turned off the economy and then turned it on again like we did in the pandemic.

Consider high inflation, a phenomenon the American economy has not seen in almost 40 years. A chart by Apollo Global Management Inc. chief economist Torsten Slok shows that everyone keeps getting wrong and still wrong about inflation. It seems that each month the consensus forecast predicts that this will be the month when the turning point will be reached and next month inflation will begin its rapid decline to normal levels. But inflation increases or stays the same every month.

To be fair, the war in Ukraine was unexpected and exacerbated inflation. But unfounded optimism persists month after month, even as inflation may take years to get under control. Why is everyone so wrong and don’t learn from their mistakes? It may simply be that it’s been so long since we’ve experienced inflation that people just don’t know what to expect and assume that familiar ‘normal’ will soon return. The Federal Reserve might also be hoping that when it says inflation will fall over the next month, the market will believe it and then it will actually happen.

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Or it may simply be that our old models and data don’t fit the current environment and keep telling us the wrong thing. Today’s inflation is being caused by many factors, many of which we have never addressed: pent-up demand from the pandemic, supply chain disruptions, exceptionally accommodative monetary policy, and plenty of government stimulus. This isn’t your grandmother’s inflation. That doesn’t mean monetary policy won’t work to contain them, but it could take longer and require higher interest rates than any model predicts.

In the past, it often took a recession to bring inflation down quickly. And it seems like that happens every day too. But no one has told American households, which are still spending. This may be because they are also in an unusual position. Despite high inflation, they still have money in the bank. Data from Chase shows that checking account balances are higher than before the pandemic for all income levels, due to a year of no purchases and many government controls. With inflation outpacing wage growth, it can’t stay that way forever. Bank balances are higher than normal, but they are falling. For now, though, spending is supporting the economy, revenues are still relatively good, and while hiring is slowing, job openings are still well above their pandemic levels.

The housing market will not necessarily collapse either. Price growth is slowing down, but there is still a long way to go before there is a noticeable drop in prices. And maybe there won’t be any declines. Many people have fixed rate mortgages under 3.5%. This means that even if higher interest rates dampen demand, supply may remain constrained because many people cannot afford to move, so prices may fall in some areas, but there won’t be the carnage people are expecting.

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These are strange times, which means the data for the last 30 years — maybe even the last 50 years — doesn’t tell much. The normal indicators may not tell us much at all. Even the reliable inverted yield curve, designed to predict a recession, may be less reliable after years of quantitative easing followed by quantitative tightening.

Maybe there won’t be a turning point when a recession hits. Maybe inflation falls and then we just recover. This is not unprecedented, but we are entering this time from a different place than ever before.

Maybe everything is slowing down, but without sudden reversals. We’re going to have low growth for the next three to five years, inflation will fall, then rise again, and then level off at levels lower than now but higher than we’re used to.

Perhaps demand won’t suddenly fall because the Fed is too timid to raise rates high enough and hold them there. Instead, spending will slowly decline as inflation saps purchasing power and erodes saving. People will continue to buy some things, and companies may be hiring fewer people, but not firing them either. Meanwhile, fiscal policy will not do much as higher interest rates prevent the government from spending more or cutting taxes.

In this world, the economy is just blah blah blah for a long time and we trudge along with uncertainty. The sudden turnaround and recession that we’re anticipating just isn’t coming. That means less pain in the short term because people don’t lose their jobs or their homes. But in the long run it can get worse because it means slower real wage increases, less investment and ultimately less growth.

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More from other authors at Bloomberg Opinion:

GDP Gives Hope to Democrats But Not Many Others: Jonathan Levin

Consumers start to crack under inflation: Andrea Felsted

How rate hikes risk instability when frontloading: Mohamed El-Erian

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Allison Schrager is a columnist for the Bloomberg Opinion on economics. She is a Senior Fellow at the Manhattan Institute and the author of An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.

For more stories like this, visit bloomberg.com/opinion

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