Over at Mountains, I have a new piece discussing the risk of recession. Here are the basic problems we face:
If the Fed’s contractionary monetary policy manages to reduce nominal GDP growth by about 4 percent, one of two things could happen. The best result would be for wage growth to slow down faster than current levels, which would allow companies to avoid large cuts. But if wages continue to rise at 6 percent and nominal GDP growth slows sharply, high unemployment is almost inevitable.
Despite the risk of recession, I am in favor of slowing down NGDP growth. I also discussed some indicators of the recent market downturn:
Today, market indicators present a mixed picture of recession risk, with market consensus looking at one as a growing possibility but not sure. For example, when stock prices are sharply down, if there was indeed a recession, they would probably fall further. And while interest rate futures markets show that rates are declining somewhat by 2023, if there was a recession, interest rates would probably fall even more sharply – probably to zero.
This information is certainly not a cause for complacency. The patterns we see in the market, including rising oil prices, declining stock prices and a flat yield curve, often occur just before economic contraction.
Read the whole thing.