For a week now, the Biden administration has tried to deny that we’re in a recession. His faithful foot soldiers in the media have tried to deny that we’re in a recession. Not 24 hours ago, even the ostensibly apolitical Federal Reserve Chairman Jerome Powell tried to deny that we’re in a recession. But the numbers don’t lie.
The stagflation recession of the 21st century has begun, according to the Bureau of Economic Analysis. And unlike any other recession of the last 40 years, we can’t rate-cut or spend our way out of this one. We just have to go through it.
After an annualized 1.6% decrease in GDP in the first quarter of this year, the BEA reported that the economy contracted by another 0.9%, nearly 2 points off of Goldman Sachs’s estimate that we would see 1% of economic growth. Although the BEA does occasionally revise past measures upward and downward, the BEA’s average revision over the past five years is just half a percentage point in either direction. Thus, the data entail back-to-back quarters of economic contraction — a recession every time it’s ever happened before.
It’s crucial to understand that this recession is not happening in spite of inflation, nor is it happening because of the Fed’s response to inflation. Rather, it’s happening because of inflation.
Over time, we’ll see the specific results of the Fed’s ever-so-slightly tapping of the brakes on the economy by raising rates. But the general destruction of consumer demand came from the climb in prices themselves.
Take housing as an example. Although liberals will point the finger at Powell, remember that even the Fed’s first hike of 75 basis points only brought the federal funds rate to not quite 2% by the end of the second quarter of this year. That’s not even as high as the historically low rates of the immediate pre-pandemic era. So when residential investment plummets by a staggering 14%, that’s from lower list prices, not from mortgage rates that ever-so-slightly rose at the very end of the quarter.
Spending on services and exports actually contributed to growth, but the real killer was an inventory drag, as previewed by big retailers such as Target choosing to slash prices over paying extra to maintain massive product. You can’t chalk that up to supply chain problems, especially when people posted a 20% increase in credit card volume from the country’s largest lenders this quarter.
None of this means that demand destruction will be enough to solve the problem, either. Consider the broader story between this recession and the last. The black swan of the coronavirus recession was over as soon as government policies suppressing economic activity were abandoned. Despite a natural return of consumer demand, first to goods in the second half of 2020 and then also to services as the vaccines rolled out, Powell remained committed to keeping the price of borrowing at zero while exploding the Fed’s balance sheet. President Joe Biden threw the match on an economy doused in gasoline with his $1.9 trillion spending bill in March 2021. Inflation has been soaring ever since.
First, they told us that using the pandemic as an excuse to print a quarter of all dollars in circulation today wouldn’t cause inflation. Then they told us that said inflation would prove merely transitory. Then, after they told us that inflation would peak — it didn’t — they told us that we weren’t in a recession — we are. So what now?
Given the molasses-slow pace of the Fed’s rate hike campaign, rates might have to chase inflation well into the double digits before real interest rates climb out of the red. After all, Paul Volcker had to push interest rates to nearly 20%. This is a recession we need and, sadly, one our central bankers deserve.
The moral of the story is this: More than any genre of recession, economists have historically avoided double-digit inflation at all costs. That’s because the recession in which you need to escape double-digit inflation is the worst kind of recession. And it’s the kind we have on our hands now.
