A quick look at the economy these days tells a worrisome story. Things aren’t looking so great.
Inflation is up 9 percent over last year.
The Gross National Product dropped by nearly 2 percent last quarter.
Rents are skyrocketing.
And the stock marking is dropping. The S&P 500 Index – which tracks the top companies in the U.S. – is in a Bear Market. And that’s not good.
This raises the question: Are we entering another recession?
Eric Swanson is a professor of economics at UCI. He studies unconventional monetary policy and the relationship between financial markets and the macroeconomy. Which means he’s the perfect person to answer the central question of this podcast.
To get the latest episodes of the UCI Podcast delivered automatically, subscribe at:
So, the big question is, are we going to have a recession?
Nobody knows the answer to that for sure. Currently the economy is looking generally pretty good, unemployment is low and job growth has continued to be fairly strong, but people are very worried that there could be a recession in the next year or two because the fed has been raising interest rates very rapidly. And traditionally when the fed has done that, that does slow down the economy.
What are the current economic indicators that can lead us to believe that a recession may be coming?
The big one would be, as you mentioned, GDP growth, which has been very weak. In fact, it was negative in the first quarter, a minus 1.6%. We’re going to get another GDP number for the second quarter in about a week. That one is also expected to be pretty weak, maybe 0% or, or maybe even a touch negative. So those would be weaker economic indicators. And those would be some of the things people are most worried about.
Even with unemployment at record lows?
Correct. Unemployment has been very, very low, and job growth has generally been pretty good. The labor market has still been very tight, so that does not suggest that we’re in a recession or that one is very close.
And that’s an anomaly from previous recessions. I remember in the ‘80s unemployment was over about 10%.
Normally a true recession would be one in which GDP is decreasing instead of growing, and unemployment would be going up and would be relatively high, and employment would be going down not going up. So, you would tend to see all of those things happening at the same time in a true recession, which is why it’s not guaranteed at all that we’re in one right now, or even that one is very close.
It seems that the driver of this might be the record inflation rate. It’s the highest it’s been in 40 years. Is the pandemic economy kind of the reason for this particular era of inflation?
The pandemic is part of it because of the supply chain disruptions that everybody is very well aware of. But it’s not the whole thing. I mean, there’s also the Russian invasion of Ukraine, which led to the disruptions in the oil market. That caused oil prices to go up, and when oil prices go up, it increases the cost of transporting goods across the across the U.S. and internationally. So that tends to raise all prices. You also have the fiscal stimulus from the pandemic, where there was a lot of money given to households as part of fiscal stimulus packages in 2020 and 2021. And now that money is being spent, and we’re seeing that show up in very strong demand and increased prices.
So the fiscal stimulus package could be an underlying part of inflation at this point?
I would say it’s part of the story. It’s probably not the biggest part, but it is a part.
So it’s myriad factors just coming together at an inopportune time.
Yeah. I mean, there’s multiple things going on.
We haven’t seen inflation like this for 40 years, and back then in 1980, the federal reserve dramatically raised interest rates – purposefully driving the us into recession. You teach this topic in your macroeconomics courses. Do you see that happening now?
I do see that happening now. It’s sort of a mini version of 1979 and 1980, that we have kind of the same thing going on. Inflation’s been going up a lot, not as much as in 1979 and 1980, but very similar in a lot of ways. And the fed is raising interest rates rapidly because inflation is too high and, and they need to bring it down. And so that’s exactly what the Fed did in 1980. And so I would expect to see the economy slow down just like it did in 1980, hopefully not nearly as bad as it did in 1980 and 1981, when there was a very sharp recession.
Well, what is the prime interest rate right now?
The federal funds rate, which is the main interest rate, just got raised to let’s see, .25 and .50 more and another .75. So must be 1.5% or so. Right. The Fed is widely expected to raise interest rates, another .75% next week. So that would get it up to 2.5%. In 1980, the Fed raised interest rates much, much higher. They raised interest rates to about 20%, and actually interest rates were above 15% for most of 1980 and 1981. We’re not nearly anywhere near where they were back then, but, but interest rates had been going up rapidly.
Yeah. I remember that was a very painful area era for the economy and especially blue collar labor.
I remember it was for everybody.
But inflation at that time was 14.5 percent. Yeah. So, in a sense, what the Fed did was painful in the short term, but it worked. Because afterwards, inflation only went up 3% until last year. And now it’s shooting up again. Can you see the same pattern happening now?
We’re seeing kind of the same pattern here. I mean, in, in 1979 and 1980 inflation was high and rising, and it was peaked at about 14.5 percent, like you said. The chairman of the Fed at the time decided that that was absolutely unacceptable and had to be brought down no matter what the cost. And they did, they raised interest rates to 20%, which put the economy into a severe recession. But it slowed the economy down dramatically. It reduced demand dramatically and prices stopped rising. And the inflation went away within a couple years. Inflation was down to 4% or, or even 3%. And then in the 1990s, even lower to 2%. And we should see the same thing this time. I think on a smaller scale, you know, the Fed will raise interest rates, nowhere near 20%. Inflation’s 9%. It’s not 14%.
Do you think 5% is …
A reasonable number? I do. I seeˀthe fed topping out around 5%. Hopefully they don’t have to go higher than that.
One of the common factors of many of the recessions over the past 50 years has been an upheaval in the oil and energy markets. We’re seeing that now, and it seems to be driven by the Russian invasion of Ukraine and OPEC raising the price of oil to over a $100 a barrel. How do you see this playing out? I see oil dropping a little bit in price. But it is a driver of inflation and also triggers a lot of other economic problems, especially with transportation of goods. How do you see the oil situation working out over the, over the short term?
I see oil prices probably remaining about where they are. There’s volatility in the oil market, but, you’re right to be concerned. They’ve come up a lot in the last six months because of the Russian invasion of Ukraine and the disruptions in the global oil market. As you mentioned, historically, a lot of us recessions have been proceeded by spikes in oil prices. So, when you have a big run up in oil prices, there is often a recession shortly afterward. Even in 2008, there was a big increase in oil prices. In 1990, there was a big increase in oil prices followed by a recession in the 1970s. There were two big increases in oil prices, both of which were followed by recessions
In comparing what we’re going through now to the early ‘80s, was the housing market as difficult then? It is in now, because right now rents are astronomical. Housing’s in short supply, so there’s a lot of competition for rental properties. And if interest rates goes up, that means new home sales will probably drop, and more people will be going into the rental market. Is this an anomaly for our era, or is there some kind of kind of historical precedence for this?
I don’t remember what the situation was back in 1980 so I don’t know if they were facing exactly the same thing in the housing market that we are – a mortgage rates were much, much higher in the 1970s and in 1980. So I think house prices were not nearly elevated, and the housing market was not nearly as hot as it is today. I mean, the housing market today is a little more reminiscent of 2005 and 2006, where we have a very hot housing market going into a recession.
And we know what happened 2008 and 2009.
I don’t think that’ll happen again. That was a, very different recession. It was a financial crisis. And I don’t see nearly the amount of subprime lending going on that was going on back then. So, in that sense, I don’t think the housing market is particularly out of whack. But rents have been skyrocketing – it’s been, you know, amazing how much rents have gone up in the last year and a half, I would say. And you’ve seen that spill over – as rents go up and up, it pushes more and more renters to try to buy a house if they can afford one. And so that spilling over into increases in house prices. Now, as the Fed raises interest rates and makes houses more expensive, it’s going to tend to push some people back into renting again. And so you’re going to see maybe even a little bit more pressure in the rental market, at least until the economy cools down more broadly.
And that offsets the growth in wages for service and blue-collar employees.
I think that’s right. I mean, wage growth has been strong for the last year or two, but probably all of that has been wiped out by higher rents. I mean, it’s been terrible.
I’ve heard a lot of commentators say that Americans are flush with cash right now, whether because of the stimulus package or because they didn’t buy anything during the COVID pandemic. Will there be a time when this cash bubble’s going to pop, and people just won’t have that kind of money to spend?
I don’t think it will pop, but I do agree that there is a lot of cash in the economy, and it’s exactly what you said – that there was people couldn’t spend as much as they would have normally during the pandemic because of lockdowns and no ability to travel. And even though a lot of people lost their jobs temporarily during the pandemic, there was a lot of fiscal stimulus from the government, which made up for that – maybe even more than made up for that. And so you have, some built up savings, because people couldn’t spend as much, and then you have some extra income from the government. And so you have a pretty flush amount of savings for a lot of people in the economy, and they will spend that back down to normal levels. It’s not going to be a crash, but they’ll gradually spend it back down to sort of your average level.
And that could also drive inflation down a bit, too.
Yeah. As people spend off their extra cash, then the demand is going to go back to a more normal level, and that will help reduce price pressures and bring inflation down.
When we post this podcast, it’s going to be right around the same time that the second quarter GDP numbers come out. And you’re predicting that it’s going to be flat, or a slight drop.
I would say it’s probably going to be around zero. Yeah. It could be a couple tenths up or a couple tenths down.
What impact will that have over the next quarter, for the U.S. economy?
The GDP can be kind of volatile, whereas like the unemployment rate is very stable from one month to the next. GDP actually can bounce around quite a lot because some of the things that go into GDP are very volatile in particular – like inventory accumulation is a very volatile component, and international trade can be a very volatile component. And so you can get a lot of quarter to quarter volatility because of some blip in international trade or in business inventories.
Do you see the midterm elections having an impact on how the economy drives into 2023?
I don’t think so. The economy’s going to have a big impact on the midterm elections. In all likelihood, it looks like there’s going to be Republican control of at least one chamber of Congress. And you’re going to end up with a little bit of a stalemate between the President and Congress. So that means nothing gets done, which just means the economy just continues to go along. Like it’s been doing.
Where do you see us a year from now?
My view is probably not a recession, but a little bit of a slow down throughout the rest of this year and then gradually kind of be picking back up again. I don’t see unemployment being a lot higher. I see job growth continuing, but at smaller numbers than it’s been doing. The GDP will be positive again, but not big numbers – 1%, maybe.
Thank you, Eric, for joining the UCI podcast. I’d like to catch up with you again next year and see what we see what’s happened.
The UCI Podcast is the production of the Office of Strategic Communications and Public Affairs at UCI. Thanks for listening.