Why Are Economists Worried When The Economy Is Booming?

Why Are Economists Worried When The Economy Is Booming?

The jobs market is booming and wages are rising, consumers are buying goods and services, and companies are investing, yet economists are sounding the alarm of a possible recession. What’s the cause for alarm when the economy, by many measures, is doing so well? asks an article in The New York Times.

Of course, rising inflation, skyrocketing oil prices and geopolitical tensions are concerning, and the bond market’s recent decline could be a foreshadow of a downturn.On the flip side, the U.S. has restored 90% of the jobs lost during the pandemic; employers added 431,000 jobs in March alone and the unemployment rate is at a low 3.6%. However, that strength could be the market’s own weakness, the article contends. Demand has greatly outpaced supply, bringing inflation swiftly up to its highest level in 40 years. And while the Fed exudes confidence that they can temper inflation without causing a recession, many economists don’t believe the central bank can pilot the economy into a “soft landing.” The economy is growing too fast, some economists argue, and since the Fed took so long to act they have no choice but to slow growth so aggressively that it causes a recession. But in spite of how easy it is to buy into the doomsaying, most economists still believe that a recession isn’t likely this year, the article continues.

The explosive growth seen in 2021 isn’t likely to be repeated in 2022, but that could be a good thing. That kind of growth—particularly in the jobs market—isn’t sustainable, and a slowdown could pull the economy back to a more normal pace. Unless pay increases fell behind inflation, it wouldn’t be worrisome, argues Josh Bivens of the Economic Policy Institute. But others believe a slowdown would hurt those who have benefited the most from the economic recovery: low-wage workers and Black Americans, whose unemployment rate, while low at 6.2%, was still almost double that of White Americans.

And while it can be a tricky line to walk, a slowdown doesn’t have to mean a recession. Fed Chairman Jerome Powell believes the central bank can chill the economy without freezing it completely, by raising rates to curb demand for houses, workers and cars—but not by too much to prevent employers from cutting jobs. While historically the Fed hasn’t usually succeeded at walking that tightrope, the current economic rebound is great enough that it can afford to lose a lot of momentum without falling backward. And most economists expect supply constraints to loosen as the pandemic wanes, which would cool inflation without any action from the Fed.

Of course, many things can still go wrong on the recovery trajectory. With the end of pandemic relief programs, many people ate away at their savings, which could bring demand down at the same time that supply is finally catching up. If the Fed acted too vigorously, recovery would falter. And if the opposite happens—demand remains high while supply remains low—inflation could soar out of control if the Fed is too cautious. The predicament for the Fed is that it has to decide how to act before it has all the data to make a fully informed decision. A recession wouldn’t happen overnight though, the article maintains. “I don’t think we’re going to go into a recession in the next 12 months,” Megan Greene of Harvard’s Kennedy School and the Kroll Institute told The Times. “I think it’s possible in the 12 months after that.”

And of course, there are the wild cards that throw everything off course, such as Russia’s invasion of Ukraine, which spiked oil prices, which in turn accelerated inflation. The pandemic is still prevalent, especially in China where strict lockdowns have been imposed amidst a new subvariant that’s also creeping across Europe, prolonging supply-chain disruptions. “The biggest unknown is global supply chains and how we manage all of those because it’s contingent on Chinese Covid policy and a war in Europe,” Green says. So while consumers are still spending and businesses are still hiring, there are still too many unknowns for policymakers to be able to act with any certainty.