Where did the recession go?

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Noel King: Welcome to Today Explained. I'm Noel King.

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Noel King: Everybody's talking about a soft landing. Soft landing. I'm here with producer Miles Bryan, also producer Sean Rameswaram, all talking about how we might not have a recession. Fed Chair Jerome Powell said it too. Given the resilience of the economy recently, they are no longer forecasting a recession.

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Noel King: Vox Media CEO Jim Bankoff, so glad I reached you. Are you excited? Okay, voice memo running, got it up to my ear. Right, great. Okay, you excited about the soft landing? I've seen that news. Noelle, yes? Looks like we might not have a recession. I appreciate the analysis. I pay attention to the analysis, but I'm always a little skeptical of the analysis. Man. Coming up on Today Explained. Optimism about the economy. It could have been a lot worse.

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Noel King: Okay, Jim, stop. Support for Today Explained comes from BetterHelp. Let me tell you a true story. Last weekend, I got an email from a listener who wanted to discuss their problems with me. And I said, look, I don't think that this is about me personally. At least I hope it's not. Why don't you try BetterHelp.com slash Explained? Absolute truth. As the largest online therapy provider in the world, BetterHelp can provide access to mental health professionals with a diverse variety of expertise. Find the one with BetterHelp. The one is not me, guys. Our listeners get 10% off their first month at BetterHelp.com slash explain. That's BetterHelp.com slash explain.

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Noel King: Soft landing. Tracy Alloway is co-host of the Odd Lots podcast and a friend of Today Explained. So, Tracy, economic forecasters and op-ed writers and analysts have been predicting that the U.S. is going to enter into a recession for more than a year now. And yet the recession keeps not happening.

Tracy Alloway: Well, you are absolutely right that there is a sort of chorus of doom mongering voices over the past year or year and a half or so. Recession. Recession. Recession. Saying that a recession was not just likely, but some people were saying it was pretty much inevitable. So you had the fastest pace of rate hikes in decades. How was this not going to result in a substantial slowing of the U.S. economy? And yet, fast forward to here we are today in July of 2023. And not only is inflation coming down, but we still have the unemployment rate very, very low. I think the last number was something like 3.6%. You have a lot of leading indicators that are, in fact, not pointing to economic apocalypse, but are starting to look up. And overall, the economy is proving much more resilient than a lot of people expected.

Noel King: Soft landing. Soft landing. What I hear you saying is we're all good now. Well, I think on balance, a lot of people would prefer the soft landing scenario to an outright recession. However, I think there is a worrying element in a lot of this discourse, which is we are not entirely clear why inflation has come down substantially without affecting the unemployment rate.

Tracy Alloway: There are a lot of textbooks, a lot of economic theories out there that say this shouldn't really be happening. You have things like the Phillips curve, the relationship between inflation and unemployment that says that you can't really move one without the other. And so I think the concern surrounding all of this is, okay, things happen better than we expected economically, but we're not really sure why that's been happening.

Noel King: Let's divide this into two pieces, Tracy. What is the optimistic case for why inflation has been falling, even though unemployment is really low?

Tracy Alloway: Okay, well, the good reasons that inflation might be falling have to do with, I guess, the resiliency of the U.S. economy and the U.S. consumer. So if businesses feel that appetite for their goods and services is continuing apace, then they're going to feel confident in spending and investing. You're going to see that strength in the economy. And I think one of the interesting things about this particular economic cycle is that we have seen a lot of businesses basically scarred by the experience of the pandemic. You know, they look back at 2020, 2021. The problem then was undercapacity. Here off the coast of Southern California, record numbers of container ships sitting idle. They didn't have enough inventories to fulfill orders. They didn't have enough staff. It's difficult to get people to apply. Once they do apply, it's difficult to get them to show up for an interview. And so there is this kind of issue of labor hoarding. That element could be at play. And so what that all means, if you put it all together, is that a lot of people are actually focused on the upswing rather than the downswing now. They might talk about recession. They might have it at the back of their minds like, oh, this is something that could be happening. But I think from a business perspective, a lot of people are focused on the economy maintaining its strength and maintaining its pace. And so they have to prepare for that. And that's one aspect of why the economy maybe has been more resilient even as prices start to fall.

Noel King: The other thing I would point to is government spending. The Inflation Reduction Act is also the most significant investment ever in climate change. The sweeping $750 billion bill targets health care, energy and the climate crisis. So this is another unusual aspect of our current economic recovery. And here I'm stealing a little bit from my AllBots co-host Joe Weisenthal, but he has a great chart that shows the unemployment rate versus the federal deficit. And in normal economic times, when you see the unemployment rate start to spike as we enter recession, you would see the deficit also go up as the government ramps up spending to try to offset some of that weakness. This time around, the unemployment rate is still pretty low, but the deficit is still pretty big. In other words, there is still a substantial amount of government spending, which is also giving people the confidence to keep buying things, keep investing in their businesses, keep hiring people and prepare for the boom rather than the doom.

Noel King: All right. So that's the optimistic case. What's the doomer case for why inflation is falling?

Tracy Alloway: I think the real concern goes back to this idea of how exactly are these interest rate hikes feeding through the economy? And there are some reasons to be worried there. So economists talk about long and variable lags. The lags between changes in financial conditions and the response to those changes from economic activity and inflation, right? This is something that you hear from the Fed quite a bit. So we know that in the modern era, financial conditions move in anticipation of our decisions. And that has clearly been the case in this cycle. So in a sense. And so that makes monetary policy extremely tricky because if you're seeing inflation fall now, then maybe it's time to hit the brakes. Maybe you don't want to tip the economy into a recession. And I think from that perspective, one of the really interesting things about the past couple of years is you've seen a lot of people reach for the historic parallel or analogy of the 1970s. Like, oh, we're going to get this massive spike in inflation and then we're going to have a wage price spiral and it's going to go on and on and on until someone at the Fed is brave enough to step in and put an end to it.

Noel King: Robin, there are those who claim Paul Volcker is the real father of this recession. In October, soon after he became Federal Reserve chairman, the Fed intensified its efforts to stop inflation. Its basic strategy was to cut back the amount of money that would be available for borrowing. But I think there's another historical parallel or analogy that's worth looking at. And not many people have been, probably because not many people who experience this one are still alive. But the 1918 Spanish flu, another massive global pandemic that led to an initial spike in inflation. But if you looked at what happened to prices in sort of the early 1920s, they came down very, very quickly because we did have policymakers tightening monetary policy. And that tipped into deflation very fast. So the question is, are we experiencing a 1970s cycle of stubbornly high prices, or are we seeing something more similar to the 1918 Spanish flu, where we have these sharp moves, extreme volatility in inflation?

Noel King: All right. So big question is, are we going into a recession? We don't know. But if we aren't, which looks increasingly likely, what is happening instead? So I think we're seeing more and more people talk about the proverbial soft landing. Soft landing. Which again was something that not many people were expecting or talking about even, you know, six to 12 months earlier. And it's funny, I asked on Twitter maybe like one or two months before this interview what our definition of a soft landing should be. And I think there is no formal definition of a soft landing. I think if you were going to be quite strict about it, you would say, well, it would be if the Fed brought inflation back to its 2% target without having a coinciding spike in unemployment. But I also think a lot of people would probably be somewhat satisfied with sub 3% inflation, which is what we basically have now, a low unemployment rate and maybe the Fed not hiking rates anymore. That would seem to be a pretty soft landing in my book.

Noel King: What might the Fed be doing differently now than it would if we were definitely going into a recession? Because for a lot of months, as you said, they were predicting that we would need to go into a recession to get inflation down. And if that's not the case, OK, what next, guys?

Tracy Alloway: Yeah. So I think you have to look at Fed policymakers from two perspectives. One, there's the mandate. You know, they have to maintain stable inflation and low unemployment. That is a reality if you're working at the Fed and making these decisions. But there's a second sort of unspoken aspect of working at the Fed, which is everyone cares about their reputation and their legacy completely reasonably. And I think a year or two ago when inflation was spiking, I think Powell's biggest concern would have been, I don't want to be the guy that loses control of prices in this high inflation environment. I want to be like Paul Volcker. I want to come in and, you know, do what needs to be done, make the tough decisions needed in order to bring down prices.

Noel King: Mr. Volcker, welcome. First, are you willing to accept parenthood for this recession? No, I'll claim no paternity. I don't even like the question being asked that way.

Tracy Alloway: That's fine. You know, Volcker in many respects is considered a hero of monetary policy circles. But now in July or August of 2023 there a more tantalizing reputational possibility for Powell which is I could be the guy that navigated this really insane period of economic history and engineered a soft landing something that no one thought was going to be possible or very few people thought was going to be possible I think that is a very tantalizing and attractive proposal for someone like Powell

Noel King: Tracy Alloway, co-host of the Odd Lots podcast. Thank you for co-hosting with me today. I appreciate it.

Tracy Alloway: Oh, thank you. It was so much fun being on. Really appreciate it.

Noel King: Coming up next, more good economic news. And we're always hoping for the best. Support for today's show comes from Adio. What is Adio? Adio is an AI-native customer relationship management system built specifically for the next era of companies. They say it's extremely powerful, adapts to your unique data structures and scales with any business model. According to Adio, Adio takes less than a minute to set up, And within seconds, you will have your email and calendars synced. You'll see all your relationships in a fully fledged platform, they say, all enriched with that actionable data. And they say you can build AI powered automations and use its research agent to tackle some of your most complex processes so that you can focus on what matters, building your company. You can join industry leaders such as Flatfile, Replicate, Modal and so much more. You can go to attio.com slash todayexplained to get 15% off your first year. That's attio.com slash todayexplained.

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Noel King: It's Today Explained. Greg Ip is the chief economics commentator at The Wall Street Journal. Greg, if the U.S. is not in a recession, does that mean we're in an economic expansion? It seems like you either have to be growing or shrinking, right?

Greg Ip: That's exactly right. A business cycle has two phases. The first phase is called the expansion phase, while the economy is growing, employment is growing, unemployment is low. The second phase is the recession phase, when the economy is contracting and unemployment is rising. So as long as we're not contracting, we're expanding. And so there's this old saying about economists, economic expansions, they don't die of old age. They don't just come to a natural end at year five or year six, they're murdered in their bed by the Federal Reserve, right? You know, there is the Fed with the gun standing over the comatose economy. And so this is always what it comes down to. Does the Fed actually have to pull the trigger or does the economy keep on growing because the inflation problem goes away?

Noel King: When did this expansion that we're currently in that has not been murdered, when did it start? It started in April 2020 after a very severe but very short two-month contraction in all the economic lockdowns that were undertaken to contain the pandemic. Twenty and a half million jobs lost in the month of April. 14.7 percent is the official unemployment rate here. These are depression-level numbers.

Greg Ip: OK, so you're telling me we've been in an expansion since April of 2020, even though it feels like the economy has been very grim in that time. That seems almost contradictory. Can you explain how it is we've been expanding for that long when, like, last year the stock market was terrible?

Noel King: Sure. Well, an expansion just means that the level of activity is going up from one month to the next and the unemployment rate is going down and jobs are created. It doesn't actually speak to whether the level of activity or the level of unemployment is satisfactory. So to give you an idea, you know, in the months after the pandemic recession ended, the unemployment rate was in double digits and it fell to like six or seven percent. Six or seven percent still pretty high. And to most people, it felt like a recession. But to an economist, the fact that unemployment was going down instead of up meant that we were in expansion.

Greg Ip: And so a lot of people today, they don't feel like it's a great economy, partly because their paychecks don't just don't go as far as they used to because of inflation. But economists look at what is the economy actually doing? Is it growing or is it shrinking? Not whether people actually like the state of the economy at this given moment. And as long as it's growing, we're not in a recession.

Noel King: Okay, so if you're expanding from miserable, it can still feel miserable. That doesn't mean it's not an expansion. In your piece for The Wall Street Journal, you write about the history of U.S. expansions and recessions. Take me through it. And I guess we start in 1945, right, when we start keeping track of this stuff.

Greg Ip: Sure. So let's just divide the post-war period since 1945 into two phases. The first phase goes from like the late 1940s up until 1981. And in this phase, business expansions on average last three to four years. And they usually end because the economy overheats, the Fed raises interest rates, unemployment goes up. And that cycle continued until we got very high inflation in the early 1980s, double digits. And Paul Volcker, who was then the Federal Reserve chairman, said enough is enough. He raised interest rates really high, over 20 percent, caused a very severe recession. Homebuilders sent Volcker their protests, scrolled on wooden planks, but Volcker stood tall.

Noel King: You know, you can't deal with that problem by simply saying we're going to let inflation go ahead. And since then, inflation has been moving down. And it eventually, in the 90s and 2000s, stabilized at around the 2 percent level. And in this second phase since 1981, expansions got longer. They averaged eight to nine years. And they tended not to end with inflation becoming a big problem and the Federal Reserve clamping down. They tended to end because we got some kind of a financial crack up. Does anybody remember the NASDAQ tech bubble from 2000 and 2001? I sure do. Pets.com because pets can't drive.

Greg Ip: Oh, yeah. This is my kind of party. Oh, yeah. And I'm sure a lot of people will remember the housing and mortgage financial crisis of 2007 to 2008 Oh yeah If you are watching us from the last home you ever own tonight consider yourself lucky But if you among the millions trying to sell this was a very bad day That was pretty bad. But it wasn't a conventional sort of, you know, inflation, Fed-driven type of recession. And then, of course, the last expansion, which ran from 2009 up until 2020, that was like almost 11 years, the longest in history. And it didn't end with inflation or a financial panic. It ended with the pandemic.

Noel King: So from that, you can see that there's two types of expansions, short and inflationary or long and non-inflationary. And that's kind of the big question, right? Which one are we in right now? Right. So this is super interesting. And I'm seeing a lot of room for optimism here, even though the CEO of Vox Media did not give us a lot of optimism. You're saying prior to COVID, prior to this, hopefully once in a lifetime event in 2020, we had 11 years of expansion. Then COVID hits and we start expanding almost immediately again after that. And now economists are saying, OK, it looks like maybe a soft landing. The only thing I would predict is that we're then looking at more years of expansion potentially?

Greg Ip: Well, sure. I mean, if we, in fact, we pull out this soft landing, you know, to go back to the old saying, expansions don't die of old age, why shouldn't it keep going? I mean, if it starts to look like the types of expansions that we've had since 1981, then why shouldn't it average eight or nine years? and eight or nine years from 2020 takes us to 2028 or 2029. That's five or six more years. There's no actual economic law that says it can't go on that long. And if, in fact, you look at the last two times we had soft landings in 1984, in 1994, those were occasions when the Fed was concerned about inflation pressures and it raised interest rates. The economy slowed a bit, but inflation never really took off and unemployment didn't really rise. Voila, soft landings. And in each of those cases, the economy continued to grow for six more years. So if, emphasis on the word if, if the Fed pulls off a soft landing this time, I can't think of a good reason why we shouldn't have quite a few more years of economic growth.

Noel King: Greg, can I ask you to do some imagineering with me? Sure. Okay. What does the economy look like five or six years from now if the expansion keeps going? Like, I'm imagining that I stop worrying about being laid off, that podcasts are super profitable again. My 401k says someday I'll be able to retire. Is that off base? What could we be – I'm rubbing my hands together. What could we be looking at here?

Greg Ip: Okay. So, first of all, absolutely not going to tell you what your 401k looks like. Let's stick to our competitive advantage here. And mine definitely is not predicting where the market is going to go. But we learned from the last expansion that the unemployment rate could go below 4% and stay there, you know, and not cause an inflation problem. I can't think why we couldn't once again enjoy unemployment stabilizing in the high threes or low 4% area. That would feel pretty good. And one of the amazing things about unemployment rates that low is that it's a tight labor market, which is especially good to disadvantaged workers. people who have traditionally been the last to get jobs and pay raises. I'm talking about, you know, minority workers, workers with less than a college education.

Noel King: It probably doesn't mean the economy growing gangbusters. The long-term growth rate of the economy is probably around between one and a half and two percent. That's not as good as a three or four percent that we enjoyed, say, in the 50s and the 60s. And that's partly because of the iron law of demographics. We're an aging society. Our labor force just isn't growing as quickly as it used to. unless we had absolutely gigantic amounts of immigration. There's really not a lot we can do about that slowdown in workforce growth. The other piece of the long-term growth story is productivity. Of those workers that we do have, how productive are they? What kind of tools and technology are they equipped with in order to produce goods and services? That one's kind of more of a wild card. Productivity hasn't really been that great for quite a few years, but there's a lot of excitement about artificial intelligence right now. So if you're like me, you're probably worrying, well, is that going to do me out of a job? So the bad news is you and I may not have jobs. The good news is that the people who do have jobs might be way more productive thanks to this artificial intelligence.

Noel King: Let me ask you something, Greg, that I genuinely have been wondering. What were you thinking as you wrote that piece for The Wall Street Journal? Because I read it and I was like, wait a second. This feels like incredible optimism. What was going through your head as you confronted the prospect of a soft landing and then a couple more years of expansion?

Greg Ip: You know, when inflation first took off, I thought it would be transitory as the economy repaired some of the problems from the pandemic. When it didn't come back down, I started to get more pessimistic. In the last month or two, I started to feel optimistic again. Maybe some of those transitory forces just took a long time to pass out of the system. And so I've started to feel like more encouraged by the economic outlook, more so than I have for quite a few months. But my optimism is still tempered, Noel, by the fact that I've seen the data fluctuate in both directions so much that it just doesn't pay to develop too much conviction about where things are going.

Noel King: Greg Ip of The Wall Street Journal.

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Noel King: Today's show was produced by Miles Bryan and edited by Matthew Collette. It was engineered by Patrick Boyd and fact-checked by Laura Bullard. Vox Media CEO Jim Bancoff, what did you think about the episode?

Jim Bankoff: It could have been a lot worse.

Noel King: I'm Noelle King. It's Today Explained. Bye!