Released minutes of the Federal Reserve’s March 20-21 meeting reveal that Fed economists see what a lot of other analysts have observed for months, only for different reasons. The economists say the United States could suffer a mild recession later this year. As they see it, the toil and trouble are coming because of recent bank failures, with perhaps more to come. Astonishingly, no mention is made of reductions in excessive federal spending, tight money supply growth and higher interest rates.
First, let’s entertain the idea of giving some slack on this. A full accounting would mean putting the causal spotlight on actions taken by the Biden administration and the Fed itself. Perhaps the Fed can better perform its difficult work if it blames the downturn on failing banks, rather than on its own, somewhat understandable, efforts to offset misguided programs pushed by the last two presidents and Congress.
But aren’t we big boys and girls? Isn’t it time more politicians recognize that errors will inevitably be made, and that sometimes they just have to admit it and get on with the business of fixing things?
The Fed report simply says this:
“For some time, the forecast for the U.S. economy prepared by the staff had featured subdued real GDP growth for this year and some softening in the labor market. Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.”
The projection itself is hardly surprising. Before the Fed saw a recession in the headlights, other forecasters had made the same call with richer explanation. The Federal Reserve Bank of Philadelphia’s February survey of 37 forecasters indicated a significant chance of negative real GDP growth later this year. Earlier, a JanuaryWall Street Journal survey of 79 economists predicted negative GDP growth in 2023’s second quarter, and third quarter growth at almost zero.
In a more recent April survey, that panel moved the recession’s projected start to the third quarter. And last November, Wells Fargo economists predicted negative GDP growth for this year’s third and fourth quarters, a recession forecast that has not been altered.
On the other hand, in January the International Monetary Fund (IMF) indicated that there was a chance the U.S. would miss a 2023-2024 recession, and if there were a slowdown it would be mild. The International Monetary Fund (IMF) turned more pessimistic in April but basically maintained this forecast.
The negative outlooks were largely triggered by Fed actions taken to slow the economy following excessive government spending, including such things as ongoing interest rate increases; reductions in bank credit or money supply and bank instability springing from the effects of high interest rates on bank-held assets; and disrupted energy, food and other markets caused by the Russia-Ukraine war. Fed economists instead focused on the recent closing of two major banks and the possibility of other banking disturbances.
To get a better handle on what may be happening, let’s look closer not at talking points, but at well-documented trends.
The roller-coaster ride began with a sharp increase in money supply growth starting in 2020’s first quarter, coinciding with the explosive expansion of post-COVID-19 stimulus spending (largely financed through the proverbial government printing press). The increase and high ride it triggered was followed by a slowing that began in the first quarter of 2021, when the Fed hit the brakes, raised interest rates and cut money supply growth to offset the stimulus spending. Suddenly the roller coaster ride got bumpy. Money supply growth then turned negative in December 2022 and remains negative.
Related Fed data show how real GDP growth surged in 2021, lagging just behind the surge in money supply growth, and is now getting weaker. As to inflation, the Consumer Price Index (CPI) accelerated about a year following the surge in money growth and is now weakening in a year-long lagged response to slow and even negative money supply growth.
This gets us to the current situation. In recent weeks, we’ve seen an apparent ease in inflation with CPI growth falling, along with diminished growth in the Producer Price Index. We have also seen weak retail sales data which suggest that GDP growth is heading south.
Putting this all together, and barring sudden policy or worldwide economic changes, it is indeed reasonable to expect a recession by the end of 2023 and early 2024, with or without additional bank failures. Would that the Fed took a larger, nonpolitical view of the situation, opened up and regularly (at least quarterly) gave us an unvarnished explanation of what’s going on.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson College of Business and Behavioral Sciences.