Visualizing recessions

Investment Analysis Clubs Macro Economic Trends and Risks
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Real GDP declined 0.9% in 2Q22 after declining 1.6% in 1Q2022. The NEBR will take several months of analyzing various factors before deciding whether this is actually a recession.

https://fred.stlouisfed.org/series/A191RL1Q225SBEA
https://www.bea.gov/data/gdp/gross-domestic-product

“Gross domestic product (GDP) is the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production. GDP is also equal to the sum of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment. Real values are inflation-adjusted estimates—that is, estimates that exclude the effects of price changes.”

The BEA’s spreadsheet shows that they use the CPI to adjust the cost of energy product and housing and the PPI to adjust the value of inventories but I didn’t see an inflation adjustment for goods and services.

The Wall Street Journal has a nice graphic of GDP changes which you can see without a subscription.
https://www.wsj.com/articles/if-this-is-a-recession-we-might…

Take a look at what happened when Paul Volcker determinedly conquered stubborn inflation by raising the fed funds rate starting in 1980. I remember this as the 1980-82 recession even though the NEBR counted it as two separate recessions. It felt like the unemployment rate was never going to go below 8% again. The stock market reached its nadir in 1982.

The guns-n-butter fiscal stimulus of the 1970s (Vietnam War plus Great Society programs), coupled with a weak Federal Reserve that dropped the fed funds rate at the first whiff of economic slowdown, led to intractable inflation.

The great fiscal stimulus of 2020-2021 is not ongoing and the current Fed is determined to quell inflation. It’s yet to be seen whether the slight drop in GDP will swerve them from their path of rising interest rates. I think it’s exactly what the Fed wanted to see. They will see this as a win, not a recession.

Expect more fed funds raises in the future. But if inflation doesn’t subside and they are forced to keep going higher, take a look at the 1980-82 recession. It could happen again.

Wendy

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It gets back to the question of “Does inflation trump recession or does recession trump inflation?” As with what happened in 2018 there was political pressure to stop hikes and QT. Will we have this same scenario or will Powell follow Volker?

Would love to hear what you all think on this.

I believe Powell will follow Volker’s path which means more pain ahead.

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<I believe Powell will follow Volker’s path which means more pain ahead.>

Powell himself cited Volcker when he testified in front of Congress last month. So I agree with you…unless Powell changes his mind and the minds of the other FOMC committee members.

Wendy

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unless Powell changes his mind

In hedge fund circles apparently his nickname is “Pivot Powell” … fastest U-turns in DC …

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I believe Powell will follow Volker’s path which means more pain ahead.

I’m with you

'38Packard

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Powell allowed himself to be badgered by the former president into dropping interest rates to near zero before COVID hit - at a time when it wasn’t needed except by those in the real estate industry and the stock market. That used up the Fed’s ammunition prematurely. Proves he can be influenced by political pressxure.

Jeff

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Powell dropped rates to zero because of two factors, one the tariffs were crushing our economic growth, two the velocity of money had gone to zero pretty much as well.

The solution was fiscal policies not monetary policies. Until Covid hit we were opting against fiscal policies.

Now people are economically doing better in many cases. But inflation worries are making the national sentiment on the overall economy shaky. Ask most people how are you doing financially and most will be I am doing well. Ask how the economy is and most will say bad. One caveat most people are not in the stock market.

This period of spending during covid was an extraordinary two years. It is over.

I do not think inflation has far to go. Fiscal policy in part is going to be active this year but most of it is much further out in time.

Back when the BBA was on the table with everything the outlay was somewhere around $35 b per month. The Covid fiscal policy was far higher per month plus the monetary policy was $120 b per month. The economy came to a complete stop. We seem to forget that. It was like having a national heart attack.

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Real GDP declined 0.9% in 2Q22 after declining 1.6% in 1Q2022.

Quibble; because it is important - GDP declined .2% in 2Q22. 0.9% is the annualized rate. If GDP decreased by 1% from the 1st quarter to the 2nd, we would not want to claim that it decreased by 4%.

BEA also illustrates this in your linked graph:

https://www.bea.gov/news/2022/gross-domestic-product-second-…

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The guns-n-butter fiscal stimulus of the 1970s (Vietnam War plus Great Society programs), coupled with a weak Federal Reserve that dropped the fed funds rate at the first whiff of economic slowdown, led to intractable inflation.

That’s a common refrain, and it’s almost entirely wrong.

Here’s a chart of Federal (and state and local) government spending. As you can plainly see, defense spending peaked during World War II, again during the Korean War, and then continued to fall throughout the 1960’s and 1970’s. Non-defense spending barely moved during the period.

https://www.stlouisfed.org/on-the-economy/2020/february/war-…

There was mild inflation in the latter sixties, exacerbated by Nixon pushing Arthur Burns to open the taps to insure a good economy, but the effects were slight. What brought inflation to a head was the OPEC embargo of 1973 which quadrupled oil prices overnight.

Suddenly every input in manufacturing was more expensive. If it wasn’t energy directly, it was the plastic to make the product, or the diesel to bring the coal to the steel mill, or the transport cost to get raw materials to manufacture and the finished products to market. It sucked dollars out of everyone’s family wallet and that caused the recession that sank Jimmy Carter. (Nixon’s jawboning and Ford’s “Whip Inflation Now” buttons had no effect.)

What worked was Volker pushing interest rates to the moon, and OPEC backing off and dropping the price of oil by 2/3 - still higher than it originally was but far lower than it had recently been, that contributed to the “Morning in America.” For the record, that period was also marked by large increases in defense spending and budget deficits, and - surprise - no inflation.

The chart doesn’t lie, and I run this quixotic campaign to try to get people to understand. I suppose I never will succeed, because it’s easier to be a deficit scold than to admit that deficits had very little to do with it. Still don’t. We’ve been in (and continue to be in) a supply constraint inflation, not a “too much money” paradigm.

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The rates were not truly centered on the FED or the free market.

The S&L industry was lending money at fixed rates that were low. The lending to an incredibly wealthy middle class was the main capital formation causing inflation of the period. Less so pay.

The pay arguments were used later to lay off well paid workers for corporate bottom lines. This was deceitful because by then the US was in a disinflationary period.

Union workers in the 70s had COLAs but if inflation was less so was the COLA. Same for SS and other government outlays. It became deceitful in the 1980s disinflation.

It could be said that cutting pay help reduced inflation but it was not the money the middle class was earning that was all that problematic. It was the middle class borrowing power that was spurred the money supply.