All we had to do was examine the inflated appearance of “recession” in Google searches. Talking about a recession not only tells you what’s happening on the ground, it also increases the likelihood of a recession by scaring off businesses and consumers. The fall in consumer sentiment, revealed by the Conference Board and University of Michigan surveys, is a clear confirmation of this feedback phenomenon.
When consumers and business people suffer from unfavorable economic conditions, they worry and talk about a recession. These are not esoteric measures that economists think about, such as lowering job offers and inverting the yield curve. Instead, it’s basic gut issues. And there is currently a strong correlation between declining consumer confidence and the growing appearance of “recession” on Google.
Other examples abound, such as the jump in gasoline prices to over $5 a gallon. There is a 78% correlation between the increasing mention of “recession” on Google and rising fuel costs this year. Drivers are noticing the price hike since they fill up their tanks frequently. It’s not like a water heater that’s only replaced when it leaks, and after 20 years of service, who remembers the cost of the old one? As the November election approached, the political implications of rising gas costs were evident when President Joe Biden shelved his green energy agenda and went hat in hand to the Saudi Arabia to ask for more crude oil.
Falling stock prices always precede recessions, and this reality is so well known that the drop in the S&P 500 index this year has an 82% correlation with “recession” searches on Google. Again, there is a feedback loop as worried investors dump stocks, thereby depressing stocks and increasing their belief that a recession is near.
Unsurprisingly, rising mortgage rates, which make homes less affordable and kill pullback refinances, are strongly correlated with searches for “recession” on Google. The same goes for the rise in the consumer price index, which has squeezed household purchasing power. The CPI climbed 9.1% in June from a year earlier, while gains in hourly earnings lagged, rising just 5.1%. Consumers are therefore worried about a recession and downsizing, which increases its likelihood.
I believe that all these fears of a recession are well founded. Even if the recession is of medium depth after World War II and reduces GDP by 2.5%, it would reduce the S&P 500 by 30% while increasing the unemployment rate by 3.8 percentage points. But it would rein in inflation, which has fallen, on average, 1.8 percentage points in previous business downturns.
Lower inflation rates are the Federal Reserve’s current goal and it is willing to risk a recession to achieve its goal. After lagging the curve as inflation rose, the central bank is serious about restoring credibility and has signaled it has no intention of favoring Wall Street this time around. There is no Powell put to call putts from Greenspan, Bernanke and Yellen.
Aside from the Fed’s anti-inflation but recessive policy, excess retail inventory continues to be an economic drag, depressing the economy in the first half of this year. Last Christmas’ overstocked goods are enhanced by all those shipments of goods from Asia that were stuck overseas, but are now moving to warehouses and store shelves. The backlog of ships at the ports of Los Angeles and Long Beach fell from 109 in January to 16 in May.
Caught off-guard retailers such as Macy’s Inc. and Target Corp. are forced to get rid of excess inventory and reduce new orders. Their situation is exacerbated by the reduction in consumer prices as confidence, real wages and inflation-adjusted retail sales decline. Liquidators are winners, but not retailers whose customers buy cans of beer instead of six packs. McDonald’s Corp. says low-income customers are trading lower and AT&T Inc. reports more users are falling behind on bill payments.
Inventories of unsold new homes jump as the housing bubble begins to burst. Higher mortgage rates and soaring home prices are putting homes out of reach for many. Housing prices in the first quarter were 5.7 times the median income, higher than the five times peak reached in the mid-2000s. Residential construction accounts for only 3.5% of GDP, but the weakness of this sector is greatly magnified by the high financial leverage resulting from low down payments and the associated depressed expenses on brokerage fees, moving costs, and new furniture and appliances.
Hopes that weak financial markets will rule out a recession altogether are dashed by the absence so far of a bear market bottom point at which shareholders are regurgitating their latest stocks and vowing never to buy any more stocks. Then the market runs out of sellers and only faces potential buyers, fueling a new bull market.
More other writers at Bloomberg Opinion:
Blaming history for making recession calls so harsh: Justin FoxTeam’s soft landing begins to pull ahead: Jared DillianThe corporate bond market hasn’t seen a recession Memo: Jonathan Levin
This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.
Gary Shilling is president of A. Gary Shilling & Co., a consulting firm. He is the most recent author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation,” and he might have an interest in the areas he writes about.
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