From executive suites to grocery stores to the halls of the Federal Reserve, the big question is: Can red-hot inflation be eliminated without tipping the economy into recession?
The irony is that all this talk of a recession is actually helping to cause it. How people feel is a huge driver of consumer behavior and business planning. Renowned British economist John Maynard Keynes coined the term “animal spirits” to describe what drives investors, consumers and business leaders. Fear, hope, uncertainty and confidence are all difficult to measure – but very important to the development of the economy.
In essence, worrying about and planning for a recession can be a self-fulfilling prophecy.
“At the end of the day, a recession is a loss of confidence,” said Mark Zandi, chief economist at Moody’s Analytics. Consumers worry about losing their jobs and cut back on spending, while business leaders fear their sales will drop and start laying off workers.
“You get into this self-reinforcing negative cycle,” he told CNN’s Early Start. “So we run the risk of convincing ourselves to be one when the emotions get so bad and start to breed themselves.”
The U.S. economy grew at an annual rate of 2.9% in the third quarter, and the unemployment rate is near a 50-year low. This won’t last long. The Federal Reserve this week cut its forecast for U.S. economic growth next year to just 0.5%, with unemployment rising to 4.6% by the end of 2023.
“Look, we’re planning for a mild recession next year,” United Airlines CEO Scott Kirby told CNN this morning. “A lot of people in business try to talk themselves into being one, and that’s how it feels to me sometimes.”
But he added, “If I didn’t watch business shows or read The Wall Street Journal, the word recession wouldn’t be in my vocabulary because we don’t see it in the data.”
Federal Reserve Chair Jerome Powell and many economists, including Treasury Secretary Janet Yellen, still believe there is a path to a so-called soft landing, in which the economy slows enough to lower inflation but not cause a recession. Yellen explained this week that recession risk is always present.
“There’s always a risk of a recession,” Yellen said on CBS’ “60 Minutes” on Sunday. “The economy remains vulnerable to shocks.”
But there is a bright side to the dark concerns, Zandi said.
“It might just help out in a weird way because if everyone is so nervous about a recession, they’re going to be cautious,” he said. “They’re not going to take a lot of risk. They’re not taking on a lot of debt. They’re not going to go out and do a big expansionary move (and) probably cool things down enough to bring down inflation so that (the Fed) doesn’t have to raise rates as much, We actually – strangely – avoided a recession.”
JPMorgan Chase & Co Chief Executive Jamie Dimon has for months expressed concern about a looming recession, citing rising interest rates and consumer spending reducing their excess savings during the pandemic.
“When you look forward, these things are likely to damage the economy and lead to a mild or severe recession that people fear,” he said earlier this month.
With inflation still at its highest level in a generation and global central banks continuing to raise interest rates, the risks in 2023 are undoubtedly high.
“I think it’s reasonable to be nervous and cautious about the economy next year,” Zandi admitted.
“But you know, having said that, I think we have a chance to get through next year without a recession.” He cited inflation as “coming fast, consumers still have cash, middle and upper income consumers are spending, businesses are not Willing to cut jobs because their number one problem is finding and keeping employees.”
He predicts “only a mild, steady slowdown in (the job market) and economic activity as we move into next year. Hopefully we don’t lose confidence and run from the bunker into a recession.”
— CNN’s Elizabeth Yang contributed to this report.