Scott Kahan: The Great 2023 Recession Watch Continues

Are we still on Recession Watch?

If they are following the financial news and hoping for clarity, it is confusing times. We are in the same place we’ve been for the last six months to a year. The economy remains strong with some signs of slowing although job creation continues. Meanwhile the markets are trying to figure out where we are. So, yes we are on Recession Watch but aren’t we always. There’s always a recession ahead. The problem is nobody ever knows when.

Is this Recession Watch more bewitching than usual?

Because we have become used to low inflation and it spiked up suddenly, some people think we can’t manage inflation without a recession. Or even that the Fed is trying to create one. But the Fed is never trying to create a recession. Rather when they raise interest rates to combat inflation they are trying to slow down the economy short of creating a recession. But that’s hard to do and often a recession is part of the outcome. As it was, famously for Paul Volcker during the early years of the Reagan administration from 1980 to ’83. The most severe recession since WWII.

Why is this time different?

We don’t know yet if this time is different.  There is a lag time between interest rate increases and when it affects economic activity and it’s not an exact science. That said, when interest rates rise as quickly as they have this time, we usually have an economic slowdown. But there are few signs of that. People are still spending. Wages are rising. The housing market is strong, despite rising mortgage rates. In large part due to the low supply of homes on the market.

It is important to remember that we are in uncharted territory to a certain extent because the root cause of the inflation was a pandemic. And our current interest rates are high only in comparison to the historically low rates preceding them. So the factors preceding this Fed tightening compared to Volker’s in the eighties are very different. And the economic impact may play out very differently as well....

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