In June last year Jamie Dimon, the chief executive of JP Morgan, America’s (and the world’s) largest bank, warned that an economic “hurricane” was “right out there, down the road, coming our way”. Other CEOs and analysts agreed; Elon Musk, who was at that point still considered a capable user of money, had a “super bad feeling” about the US economy.
However, economic activity in the US remained strong: GDP grew by 3.2 per cent in the third quarter of 2022, and in December employment increased by 223,000. By November, Goldman Sachs predicted that America would “escape recession in 2023”, and Joe Biden’s press secretary, Karine Jean-Pierre, declared that there were “no meetings or anything happening like that in preparing for a recession” in the White House.
At the same time, some of the classic indicators of impending recession remain in place. Investors in financial markets are still charging more to lend America money in the short term than the long term (the “yield curve” on US government bonds is “inverted”), a situation that has been an accurate predictor of every recession in America for more than 50 years. And the underlying fact is that the US, like other countries, is enduring high inflation, which its central bank is trying to tame with higher interest rates. Where, then, is America’s missing recession – and will it ever show up?
The first person to consult is Milton Friedman, who wrote in 1961 that the effects of monetary policy are “long and variable”: for interest rates to make themselves felt across the whole economy can take a couple of years. But he’s been dead for 16 years, so I asked Stephen Miran, a former senior adviser on economic policy to the US Treasury and co-founder of the asset manager Amberwave Partners, for his view. Miran said there are indicators of a slowdown in the near future: one index that tracks orders, hiring, production and other factors in the services sector (which makes up two thirds of the US economy) contracted in December for the first time since March 2020.
But the sector Miran is watching most closely is America’s housing market. It is in housing, he said, that the recession is being kept at bay, and it is the housing market that will be the catalyst for the downturn when it transpires.
“Economists like to say that housing is the business cycle,” he explained, because it represents a huge amount of spending – not only on houses themselves but on all the associated goods and services (moving house, furnishing, decorating, insurance, legal services, finance), and the employment that spending creates. The construction sector alone accounts for eight million jobs. “So, when you get a swing of 10 per cent of employment in that sector, which is very possible if you have a big collapse in housing demand, that’s easily 800,000 jobs.” With every one of those newly unemployed people spending less, each lay-off adds more “demand loss” to the economy, compounding the effect: “You could easily get two to three million jobs lost from the downturn in housing. That’s a real recession.”
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Miran thought the reason this hasn’t happened already is because, thanks to the global jangling of supply chains caused by the pandemic, it now takes over a year longer to build a house from start to finish in the US. Housing starts have fallen, but the lay-offs won’t arrive until all the houses currently being built are finished.
But then, maybe they won’t: it could also be that having gone to all the trouble of recruiting people in a tight labour market, employers will hang on to all those workers for as long as they can. This “labour hoarding” could be amplified, according to Miran, by the Infrastructure Investment and Jobs Act, through which the US government plans to spend tens of billions on construction in the coming years. It’s a “plausible theory”, he argued, that enough employers will move from building houses to building roads so the lay-offs won’t materialise.
Does this mean America could spend its way out of a recession? Sadly not. In an economy with the lowest unemployment rate since 1969, “there’s a lot of dry kindling out there for inflation”. The fundamental logic of the business cycle is that a recession is necessary. “If we get a re-acceleration in the economy, odds are that we’ll also have a re-acceleration in inflation,” Miran said. The Federal Reserve would then be forced to raise interest rates to fight that inflation, and in doing so induce a recession anyway.
“Historically, there’s never been an instance in which inflation gets put to rest without a material rise in unemployment – by which we mean a recession,” explained Miran. He added that a delayed recession might be worse, because the other factors that kept the economy aloft – such as the savings built up by households during the pandemic – will have petered out.
It could be argued that a delayed recession would also be bad for the incumbent government. The Democrats might be better off if a sharp but brief downturn materialised now, and they had time to deal with it before the next election campaign begins. By committing to a huge public spending plan in 2021, Joe Biden has created the conditions to hold off the downturn – but it may arrive when it is least welcome.
[See also: We can’t ignore the pensions time bomb]