Don't Look Down: US Recession in 2024?
A Contrarian View: The US Economy is on thin air...
There is a certain element of Wile E. Coyote about Bidenonmics – the theory that you must me aware of standing on thin air for it to drag you to your death in badly-drawn desert canyon. The wild thing about a consumer driven economy is that it can stay aloft on thin air simply by pretending its on terra firma. Well, up to a point.
Higher rates have not triggered the recession we thought it would, yet. The latest quarterly earnings out this week have been the best in a year – held aloft by summer spending on the restaurants that survived the pandemic, day drinking, travel and on-line shopping.
Inflation is generally falling globally, and while US employment is creeping up – to 3.9% - it is still historically very low. Investors think that rates have stopped rising, but they aren’t going down anytime soon either. Accordingly, long-term bond yields have risen sharply.
There is a wrinkle in those numbers – people are eating out more this year, they are just spending more. Travel numbers are up, but so are prices. Unemployment is rising, slightly. Banks have reported the first uptick in late payments and swelling balances on credit cards. Americans still have an estimated $1trl buffer before the pandemic stimulus and savings runs out, but when that happens, we’re hitting the breaks on spending.
It’s not just consumers either - the US government payed a scant 1.2% on 30-year debt bonds during the pandemic recession, now it pays 5%. Janet Yellen, the treasury secretary says these rates are a sign of good health, but then again, she would. The Republic’s debt service is around 8% of GDP, which is an insane level to maintain with full-employment in peace-time. It’s about to out-pace military spending. The debt service alone would be a drag on the economy – just ask Argentina.
There is generally accepted 9-month lag between a shift in monetary policy and its effects – but that is an average. It can take longer so there is no real reason to believe that we’ve dodged a bullet. Not yet, at any rate. The effect of all this (and this is a semi-contrarian position) is a recession next year. It won’t be one of those “is it or isn’t it” recessions we talked about in 2Q, either. We’re all going to know, because it will be harsher than a soft landing, but nothing we’d call a crisis, either. With any luck, the 2024 recession will be wrapped up by the end of the year. Recessions make people panicky and mean, and the migration crisis the administration is currently ignoring is going to give people a convenient focus for their fears. This issue will be the decisions that we make while in a foul economic mood.
Almost exactly a year from now, the US is going to the polls and the world is watching with good reason. The biggest factor in the upcoming Carnival of Shame won’t be whether or not Trump is found guilty, even his supporters mostly suspect that he is. Nor does it matter if Joe Biden earmarks $3trl in subsidies for the squirrels on the White House lawn - we already knew that just might be in the cards too. It’s going to be the recession.
Calvin Coolidge was the last president elected with a recession right behind him, and that was 1924. And “silent Cal” was such an enigma that no one was sure how much he’d had to do with it. Regardless, if the ground falls away from the economy before November, whatever hope for Biden has for the general election evaporates. And we have to assume that behind the curtain, the Democrats know this.
Without a sensible third option, that puts Trump – the self-declared “Tariff Man” – in the White House. That will help the American economy in the short run, and the market will respond accordingly as the media explodes in righteous indignation. The medium and long run effects on both the domestic and global economy, however, will be a disaster. Everything will become both scarcer and more expensive.
And we aren’t even talking about the fact that leaving Ukraine to its fate – which seems to be Trump’s plan - will trigger a nuclear war in the next decade or so. That’s not going to help anyone’s 401(k).