Team Soft Landing starts to get ahead
It is a very disconcerting time in the field of economics. Activity has contracted, as measured by official calculations of gross domestic product released by the Commerce Department, but it doesn’t look like a recession. The economy created 2.74 million jobs this year through June. This earnings season has shown that many consumer-facing companies such as Starbucks Corp. and Uber Technologies Inc. are enjoying pricing power, and travel companies are seeing booming demand, with Marriott International Inc. saying hotel occupancy is nearly back to pre-pandemic levels. If you have taken a flight in the United States recently, you have probably noticed that the plane is completely full and the airports are crowded. Overall, members of the benchmark S&P 500 are on track to post record second-quarter earnings.
If it’s a recession, it’s strange. But recessions come in all shapes and sizes. That of 1990 and 1991 was mainly confined to the commercial real estate and banking sectors, although it took until 1995 for the unemployment rate to fall back to where it was before the recession. In terms of GDP, the dot-com crash of 2001 could hardly be considered a recession, but it was extremely painful due to the massive stock market crash. Then there was the financial crisis of 2008 and 2009, called the Great Recession because of its depth and duration, with unemployment reaching 10%, a housing market crash and personal bankruptcies rising. The 2020 Covid-19 recession saw the economy contract the most since the Great Depression and the unemployment rate soar to almost 15%, but then rebound quickly thanks to unprecedented fiscal and monetary stimulus.
Maybe the reason there’s so much talk these days about whether the economy is in a recession is because of recency bias, with people remembering how damaging the last two were and thinking the next will be of the same magnitude. There has been a lot of debate on social media about the definition of a recession and when it officially starts. The technical definition is that a recession is marked by two consecutive quarters of declining GDP, which is what we just saw. But the official arbiter, the National Bureau of Economic Research, takes a broader view, looking for what it sees as a substantial drop in activity over an extended period.
The labor market is the main source of cognitive dissonance, with the unemployment rate anchored at 3.6%, barely a tenth of a percentage point above the half-century low of 3.5% set in 2019. Although job vacancies fell to 10.7 million from a peak of 11.9 million in March, they are still double the long-term average dating back to 1999. The Institute for Supply Management measuring growth in the services sector unexpectedly strengthened to a three-month high in July on stronger business activity and orders.
Financial markets are starting to accept the idea of a soft landing. The S&P 500 is up more than 13% from this year’s low on June 16, US Treasury yields have fallen from their highs, the market for new corporate bond issues is in booming and the dollar rally has taken a break, for the time being. What all of this means is that financial conditions are materially easier than they were a few weeks ago, much to the chagrin of the macro-doom crowd. The Fed has received a lot of criticism for not anticipating the sharp acceleration in inflation, but if the central bank is able to bring inflation under control without too much economic pain, that would certainly go a long way in restoring its credibility.
If we’ve learned anything over the past two years, it’s that old economics textbooks are no help with what’s happening now. No one has experience with the consequences of an economy that comes to a screeching halt, dumping some 17 million people over two weeks and contracting 31% only to bounce back just as quickly thanks to government free money programs that injected trillions of dollars straight into the pockets of consumers to support ultra-loose monetary policy. As such, anyone expecting the economy to follow the usual boom and bust patterns will be disappointed. It is plausible that the old economic models are no longer relevant and we need to find something entirely new to guide us through what is happening.
More other writers at Bloomberg Opinion:
• Blame history for making recession calls so harsh: Justin Fox
• Do animal spirits fall into a stupid money trap? : John Authers
• Corporate bond market not rated on recession: Jonathan Levin
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Jared Dillian is the editor and publisher of Daily Dirtnap. Investment strategist at Mauldin Economics, he is the author of “All the Evil of This World”. He may have an interest in the areas he writes about.
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