Michael Brochstein/Sipa USA via AP Images
Fed Chair Jerome Powell speaks at a hearing of the Senate Banking Committee, June 22, 2022.
The term “internet speed” normally refers to the quickening of the news cycle, how events rapidly gain and diminish in prominence before anyone can get a handle on them. We now appear to be seeing how that acceleration can also apply to economic cycles, and policymakers had better catch up before they inflict sustained damage.
Last week, Federal Reserve chair Jerome Powell said he was more concerned about stopping inflation than preventing a recession. This prioritizes inflation as the immediate problem, with recession some event to deal with in the future. But the opposite may be true.
A number of indicators in the past couple of weeks show inflation actually softening or reversing. Oil prices are plummeting, down by around $25 per barrel in the space of a month. The cost of gasoline, correspondingly, is moving downward (the national average is down month over month for the first time in a while) and has more room to run. The infamous crack spreads, the measure of refining profit margins that was a major factor in higher gas prices, are also plunging.
In addition, commodity prices are falling, from corn to wheat to cotton to lumber to copper. Some have their own particular reasons, including some more promising supply news for a change. Wheat prices are at the same levels they were at the beginning of the Russian invasion of Ukraine, in part because of renewed talk of getting wheat out of stalled Ukrainian ports, and in part because of good weather globally raising hopes of a bumper crop, a reversal from earlier in the year. Farmers are optimistic about corn and soybeans too.
Even rent prices, which were seen as a major looming source of inflation, are starting to stagnate and even fall in cities like Tallahassee and San Diego.
There’s one area where prices are still going up: natural gas. That’s mainly due to an exogenous shock, a fire at an LNG export site in Texas that will keep the terminal offline through the rest of the year. But while this is wreaking havoc in Europe and Asia, threatening the collapse of several industries, the U.S. price has barely budged, because the damage to the export terminal keeps more natural gas in the country.
As Zach Carter correctly notes, no new refinery capacity has come online in the last two weeks, and no crude oil has been pumped that would meaningfully impact prices. There’s still a war raging in Europe that has weakened the distribution of energy and food commodities. The only plausible explanation for this fledgling turnabout is the pricing in of recession, the expectation that it’s unavoidable and that demand will slow down markedly.
The strain that families are feeling in their budgets, and the impulse to cut back on spending, is palpable across a range of data. The Census Bureau’s Household Pulse survey shows a spike in Americans reporting difficulty with affording typical expenses. The number of Americans reporting that they’re struggling financially reached a five-year high in a Monmouth poll released yesterday.
This should change the approach toward the economy, though I fear we’re already too locked into inflation-fighting.
That’s driving some economic indicators. U.S. manufacturing dipped to its lowest level in two years in June. Factory orders are falling off all over the world, a direct result of slowing demand reducing the need to produce. The housing market is showing significant signs of demand collapse as mortgage rates elevate; falling lumber prices correlate with an associated decline in housing starts. Goods spending is dropping in the U.S., though services spending is bouncing back, a kind of stir-crazy dividend after years of caution with travel or outside-the-home activities during the pandemic years of 2020 and 2021. Real disposable income is also pointing downward. The Atlanta Federal Reserve is expecting GDP to come in lower in the second quarter, which would be the second straight month of declining GDP; by some analysis, that’s a recession.
But it’s not just the fact of recession—it’s hard to square a full-on deceleration with such a strong job market, for one—as much as it is the expectation of recession. The Fed’s posture has clearly indicated that financial conditions will tighten over the medium term. That’s feeding into the main accelerator on prices in recent years: commodity speculation. When Citigroup says that oil could go to $65 a barrel by year-end if there’s a recession, and the Fed is screaming that they don’t care about a recession as much as price stability, investors pick up the signal and start crushing the price even before economic conditions can get to it.
So constant talk about recession can help fuel recession in our internet-speed world. When Powell said last week that “supply and demand are really out of balance,” he may have already been out of date, because his rhetoric had already convinced investors and speculators that recession was on the way.
This should change the approach toward the economy, though I fear we’re already too locked into inflation-fighting. The worry should not be too few tools to lower prices, it should be too few brakes on those tools. That should be an emergent fear. As Joe Weisenthal wrote this week, even quick recessions can cause lasting damage to business output. Ironically, this supply reduction from the 2008 and 2020 recessions was a primary factor in high inflation. The “cure” to that, of a grinding recession, will put us behind down the road, if we don’t stop punishing demand.
I agree with Carter that the recent inflation easing isn’t necessarily permanent. There are lots of supply dangers out there: a potential West Coast port strike or lockout, Vladimir Putin cutting off food supplies to the world or natural gas to Europe, skyrocketing energy bills in Texas. Furthermore, Carter writes, “volatility in commodity pricing is a problem no matter which direction the prices are going. Nobody can plan. Private investment to boost supply—the ideal fix for inflation—won’t happen.”
Certainly, this easing, whether pricing in recession or just an eye in the storm, shouldn’t lead to government letting up on finding solutions to make critical supply chains more resilient. But it should call into question the efforts to punish demand. The Fed’s actions (supplemented by fiscal austerity) have only inflated expectations of recession, effectively telling businesses not to invest and to retrench. The Fed cannot print a new LNG terminal or more abundant energy. You can say that the central bank is doing its job of stopping an inflation spiral, but there are serious negative consequences to its approach. It’s making it harder to take the steps needed to boost supply and get off this cycle of fragility.
