By D. Brian Blank and Rodney Ramcharan
With the current U.S. inflation rate at 7.1%, interest rates rising and housing costs up, many Americans are wondering if a recession is looming.
Two economists discussed that and more in a recent wide-ranging and exclusive interview for The Conversation.
Brian Blank is a finance professor at Mississippi State University who specializes in the study of corporations and how they respond to economic downturns. Rodney Ramcharan is an economist at the University of Southern California who previously held posts with the Federal Reserve and the International Monetary Fund.
Both were interviewed by Bryan Keogh, deputy managing editor and senior editor of economy and business for The Conversation.
Below are some highlights from the discussion. Answers have been edited for brevity and clarity.
Are we headed for a recession in 2023?
Brian Blank: The consensus view among most forecasters is that there is a recession coming at some point, maybe in the middle of next year. I’m a little bit more optimistic than that consensus.
People have been calling for a recession for months now, and this seems to be the most anticipated recession on record. I think that it could still be a ways off. Consumer balance sheets are still relatively strong, stronger than we’ve seen them for most periods.
I think that the labor market is going to remain hotter than people have expected. Right now, over the last eight months, the labor market has added more jobs than anticipated, which is one of the strongest streaks on record. And I think that until consumer balance sheets weaken considerably, we can expect consumer spending, which is the largest part of the economy, to continue to grow quickly.
[But this] doesn’t mean that a recession is not coming. There’s always a recession somewhere down the road.
Rodney Ramcharan: Indeed, yes, there’s a likelihood that the economy is going to contract in the next nine months. The president of the New York Fed expects the unemployment rate to go up from 3.5% currently to somewhere between 4% to 5% in the next year. And I think that will be consistent with a recession.
In terms of how much worse it can be beyond that, it’s going to depend on a number of things. It could depend on whether the Fed is going to accept a higher inflation rate over the medium term or whether it’s really committed to getting the inflation rate down to the 2% rate. So I think that’s the trade-off.
Will unemployment go up?
Blank: [Unemployment] hasn’t risen much, and maybe it’ll pick up to somewhere close to 4%. Many are expecting something like four and a half percent. And I think that’s certainly possible. And I think that we can see small upticks in the coming months.
But I don’t think it’s going to rise as quickly as some people are expecting, in part because what we’ve seen so far is a lack of labor force participation. Until more people enter the labor market, I think there are going to be plenty of jobs to go around.
What is your outlook on interest rates?
Ramcharan: As people find it more and more difficult to find jobs, or to get jobs as they begin to lose jobs, I think that’s going to dampen spending. And we’re seeing that now as the cost of borrowing has gone up sharply, and the Fed is expecting that.
The expectation is the federal funds rate will go up to 5% by next year. If you tack on another couple of points, because of the risk involved, then the cost to borrow to buy a home could potentially get up to 8% for some people. And that could be very expensive.
And the flip side of this for businesses is there’s potentially going to be a slowdown in cash flow. If consumers are not spending, then the revenues that businesses depend on to make investments might not be there.
The additional piece in this puzzle is what the banks will then do. I think banks are going to begin to curtail the extension of credit. So not only will interest rates go up for the typical consumer and the typical business, it’s also likely that they are more likely to experience denial of credit, and so that should together begin to slow spending quite a bit.
After massive increases in housing prices, what caused them to suddenly drop?
Ramcharan: As the Fed lowered interest rates, there was a massive shift among the population for various reasons. They decided that housing was the right investment or the right thing. And so when 50 million people all collectively decide to buy homes, the supply of homes is reasonably constrained in the short run. And so that led to this massive increase in house prices and in rents.
In the last three months, the housing market has cooled sharply. We’re now seeing house prices beginning to fall. I would imagine, going forward, the housing market cooling is going to be a major driver behind the slowdown in the inflation rate and in real estate investment trusts. So that’s positive.
Our recent election just changed the composition of Congress. How will that affect the economy?
Blank: Certainly, when we have a divided Congress, we’re less likely to see decisions made that involve passing legislation that might support the economy. And I think it’s likely the Republican House is going to become a little bit more conservative with spending.
And so if we do start to see a downturn, I think you’re less likely to see legislation that might help support an economy that could be in need of it. That is going to make the job of the Federal Reserve more important.
How certain are these predictions?
Ramcharan: I just want to be careful here and let your viewers know that we’re making these statements based on theory, because the inflation that we’re experiencing now comes about from a pandemic, and there really is no evidence, there’s no data available, that people can look to to say, “What happens to an economy after a pandemic?” That data does not exist.
So we’re trying to piece together the data we do have with the theories we do have, but there’s a huge band of uncertainty about what’s going to happen.
Watch the full interview here.
D. Brian Blank is Assistant Professor of Finance, Mississippi State University. Rodney Ramcharan is Professor of Finance and Business Economics, University of Southern California.
The Conversation arose out of deep-seated concerns for the fading quality of our public discourse and recognition of the vital role that academic experts could play in the public arena. Information has always been essential to democracy. It’s a societal good, like clean water. But many now find it difficult to put their trust in the media and experts who have spent years researching a topic. Instead, they listen to those who have the loudest voices. Those uninformed views are amplified by social media networks that reward those who spark outrage instead of insight or thoughtful discussion. The Conversation seeks to be part of the solution to this problem, to raise up the voices of true experts and to make their knowledge available to everyone. The Conversation publishes nightly at 9 p.m. on FlaglerLive.
This is Biden’s America. If you voted for it, you deserve it, the rest of us don’t. Look at what your dollar buys you today. Every item in the headline is all after 2 years of Biden-Harris, it’s all man made misery, policy driven by the Biden-Harris. By 2024, the data in their reporting databases will be this new level of recession & misery as the new normal of Biden prosperity. Biden-Harris, leaving more Americans behind than ever before. So this is how they do it, pay attention this time, it’s Clinton => Bush => Obama all over again. Trump actually was reversing the inflation of the first 16 years of the swamp for the 2000’s. this is not the misfortune of a hurricane of a natural disaster, those catastrophic fails are boardroom & executive level decisions, corporate & government.
@I knew Ira Foster too
Did Ira paddle your butt–or your head? Seems like you spent a little too much time meeting your pals at “Snead’s place” after cutting class.
Good luck, and good night.
Ray W. says
Thank you, Pogo.
As I have commented before, I, too, knew Vice-Principal Ira J. Foster. And I knew only too well every paddle he kept in his lower right desk drawer. Pick your poison, he would say. Enthusiasm in youth, often mistakenly called mischievousness, takes many forms. I had great fun bringing two dimes to shop class and using them as a crude wrench to loosen nuts on the bolts holding desks together, at least up to the moment of my hearing the whistle of the descending paddle. Ira J. Foster’s office was the place where fun went to die. I was too dumb to fully comprehend the evidentiary value of the brand-new bolts and nuts holding the desk together.
The thing that struck me, when I read 99’s original comment about Mr. Foster, was this: Foster was being recalled for the least important thing about him. Mr. Foster, and I knew this even as a student, accomplished so much, every day, in service of ALL the young people he served.
I never had an interaction with Foster for a disciplinary issue. He called me aside only once; he told me my consumption of the library cards used to check out library books was a pleasant surprise–I filled three, front and back, and was on a fourth, by the time I finished the 9th grade. He knew about the library cards because he knew I had never been known to use the student cafeteria–ever–and had taken the time to find out where I was instead. Mean old Foster…
Ray, did you, by chance, have the good fortune to be instructed in English by Mr. Anderson? To this day, I give thanks for Anderson, and indeed, all the faculty of Seabreeze. IMO, diamond cutters do little–compared with our public school teachers. And I am totally disgusted with desantis, et al., and moreover, the so-called political party that is desantis’ engine.
You forgot to blame Wilson, Roosevelt, Truman, Kennedy, Johnson, and Carter – all prior Democratic presidents of the 20th century. It’s all their faults.
And, you can go back further with a little research .
I know – Research is a dirty word, FOX news is easier.
Well Jimbo99, I guess you should have been in the interview instead of D. Brian Blank and Rodney Ramcharan. After all, Blank is just an Assistant Professor of Finance, Mississippi State University and Ramcharan is just a Professor of Finance and Business Economics, University of Southern California.
Fact: The sum total for inflation during Obama’s 8 years was 14%, or 1.75% per year. The sum total for Trump’s 4 years was 7.7%, or 1.925% per year. So in FACT, Trump was not and did not bring down the inflation rate.
Anyone who lived and worked through the late 1970s and early 1980s knows what real inflation was. In 1979 it was 13.3%. The result was that Jimmy Carter did not get reelected.
The Covid pandemic disrupted the production of goods worldwide. The several stimulus packages, passed by both parties, resulted in more money chasing fewer goods. Just as the Covid pandemic has slowed, Trump’s “buddy” Putin decided to launch an unprovoked war of aggression against Ukraine. Up went the price of oil (gasoline) as a result.
Ray W. says
I see that chicken wings prices are dropping now that the avian flu epidemic that swept through chicken production facilities, prompting the culling of millions of chickens from flocks, seems to be abating. Am I to understand that you blame Biden for that event?
I also see that beef prices have dropped significantly lately. I looked up the possible causes. It seems that a massive drought extending throughout much of the Midwest and upper far west, to the extent that wheat crops failed and water levels dropped so much near Memphis that barges could not proceed south with grain until the Mississippi channel was dredged. Am I to understand that you blame Biden for those events?
I also read an article many months ago about drought-caused potato crop failure in Idaho. It seems that for the first time in many decades, Maine potato distributors exported potatoes to Idaho so that Idaho grocery stores could sell potatoes. Am I to understand that you blame Biden for that event?
I believe it is not a stretch to understand that Russia invading the Ukraine impacted the export of approximately 25% of the world’s annual wheat crop, among many other agricultural products. Am I to understand that you blame Biden for that event, too?
I do agree that recession may be around the corner. I have lived through nine recessions in my years. Most began and ended during Republican presidencies. Most involved crude oil disruptions, rising interest rates, higher unemployment, and rising inflation. Almost all involved stimulus packages passed by Congress and implemented by mostly Republican presidents. It seems that the only reason we have not yet entered into a 10th recession is strong jobs reports. The Bureau of Labor Statistics recently released the latest jobs reports. Unfilled job openings were surprisingly still above 10.5 million, indicating strength in that sector of the jobs calculus. That means 1.7 jobs for every person seeking work. 4.2 million people quit their jobs last month, which means that workers are comfortable leaving existing jobs in search of better jobs.
Something tells me that when FlaglerLive commenters like Jimbo99 elect to purposefully live in a small world, they comprehend small issues. The world is much bigger than you present it to be.
Ray W.: I think that when you loosened the bolts on school desks, with your dime, that one of those desks was occupied by Jimbo99, and when it collapsed, he saw a picture of a donkey at that precise moment. Hence, he has the same focus on Biden-Harris that my husband has in a restaurant when the service is slow. It all makes sense now.
Thank you for mentioning that recessions tend to happen during Republican control. It was Democrat Franklin D. Roosevelt who got us out of the Great Depression. Clinton, by the way, had a budget surplus. Oh, and I’m not a Democrat. Just sayin’.
Bill C says
Trump crashed the economy by ignoring Covid, calling it a hoax, then suggested seriously that maybe we should drink bleach because it kills germs. Also, when Obama took office the Dow was at 8,000. When he left office it was at 20,000. Then Trump crashed it.
History will show that Trump’s Operation Warp Speed produced 3 vaccines before Biden was even sworn into office. History will show that Trump met the 1 million vaccines per day rolling 7 day average that Biden set as his goal by the end of his 1st 100 days. What did Biden do again in 2021 ? Oh yeah, he shut down pipeline projects. And that’s when gasoline prices and inflation took off.
As for the Dow, The closing price for the Dow Jones Industrial Average (DJI) on January 19, 2021 was $30,931.96. Have fun using google instead of distorting the truth about Trump crashing the Dow. I’ll let you get away with rounding Obama’s last day. The closing price for the Dow Jones Industrial Average (DJI) on January 19, 2017 was $19,732.40. As for the $ 8K Bush Dow figure. He’s swamp just like the rest of them. The match on Trump vs Obama, with bailouts Obama gained 12,000 points. In 4 years, Trump gained 10,000 points with a pandemic that essentially shut down the USA economy. As for Biden, the Dow closed today at 32,930, in 2 years the Dow has grown 2K. I’ll let you figure out whether that’s good or bad as performance.
But… But… It is just transitory….
Ray W. says
Herman, I agree with you that it is all just transitory. And, as my father used to intone: A hundred years from now, it will never make any difference.
The ORIGINAL land of no turn signals says
With sleepy Joe at the wheel a recession is the least of our worries.
Hey Original: Where’d you hear that term “Sleepy Joe?” I wonder.