More Questions Than Answers: Thinking Through Recession Risks
Events are moving fast in the Middle East. Over the past week, I did several interviews on the risks higher oil prices could pose to the U.S. economy and the broader economic outlook. Uncertainty was a common theme. Below are excerpts from three conversations where I tried to think through different scenarios.
Recession risks.
“I am not on recession watch, but I am concerned,” is my reply now when asked about the chances of a recession. Jean Chatzky on HerMoney Podcast asked me how serious the situation in the Middle East is; here is my reply:
“The conflict is serious. We are in the very early days of this, and it is impossible for me or anyone else to know where this is headed in terms of does the conflict get worse, does the Strait of Hormuz open up or does it stay closed for a very long time? There are so many unanswered questions. I completely understand if people are feeling anxious. It’s part of my job to stay level-headed. But I get anxious, too. This is very serious.
It’s important to think through the scenarios. Make some plans for it. I am not on recession watch. I think there’s still a lot of strength in the economy, but I am concerned. This is another bad event. We have had to buffer quite a bit in the last year with big policy changes, whether it’s tariffs or reductions in immigration, and a lot of uncertainty. The U.S. economy really pushed through that largely, pretty well. Not everybody. Now we are facing another big event, potentially a very big event, and thinking through where this could go.”
There’s a lot more in the conversation, including how higher oil prices affect consumer prices more broadly, how the US economy differs now from the 1970s, why the low hiring rate is a problem, and why we need government statistics and an independent Federal Reserve.
Thinking through the scenarios.
Three weeks ago, financial markets had priced in more than two and a half rate cuts this year, and now, with inflation expected from higher oil prices, that’s fallen to less than one cut. That’s one possible path, but as I explained in an interview on Marketplace, there is another scenario in which the Fed might cut rates this year:
“Higher inflation could cause the Fed to eventually raise interest rates. But Sahm said the Fed will also consider what could happen if energy costs rise so high that the economy slows down.
“That’s a scenario in which the Fed would be stepping in and potentially cutting rates, even though those energy prices are higher, because it’s starting to create unemployment and really wreck growth,” she said.
Sahm said all the Fed can do, at this point, is gather as much data as it can to prepare for any of those outcomes.”
It’s too soon to say which scenario will be the most relevant.
Layering risk upon risk.
Last Friday, I had a wide-ranging conversation with Leslie Falconio at UBS, during which we discussed the conflict in Iran, the implications of a new Fed Chair, the path of monetary policy, the US labor market, and economic uncertainties. My reply to her last question on “the biggest risk you see over the next twelve months:”
I am struck by the rapid-fire different risks. It feels like every week when I sit down to write my weekly update for work I am bringing in a brand new risk. I am reading about Venezuela, I am reading about the Middle East. The layering on of risk. It’s unsettling.
That said, my biggest miss last year was on the growth side. I really thought that with the tariffs, lower immigration, the uncertainty, and DOGE, it would be, if nothing else, growth-negative. That is not what we got last year. We have a very resilient economy. An important part was AI and technology picked up. It feels like the pace has continued to pick up. I am uncomfortable. That “move fast and break things” eventually, you break something you can’t fix right away. It’s more of a background risk as opposed to any particular event.
There’s a lot of concern about a recession. Recessions are basically unforecastable events. It’s usually the thing you weren’t thinking about that hits you. We’re thinking about a lot of risks right now. I am happy to hear them all in conversation. Puts some sunlight on them and thinks through the scenarios. It’s usually the thing you aren’t thinking about that bites you. At this point, it’s kind of frightening given all the things we are dealing with.
In closing.
It’s a challenging and uncertain time. I try to add perspectives from my training as an economist, but I would not want to pretend that I have all the answers. I had an international TV interview this week that ended with the anchor saying that I had offered “more questions than answers.” Normally, I would take that as a failed interview, but we are not in normal times.
Bonus content. Adding here some experts I have been learning a lot from.
Odd Lots podcast with Tracy Alloway and Joe Wiesenthal is, as always, a must-listen for understanding current economic events. Their interview with Rory Johnston, founder of Commidty Context, this week is excellent. Johnston is a great follow on energy.
Javier Blas, the energy columnist at Bloomberg, is also very informative. This video is a good starting place. His columns are also very good.
One last personal note. Today is my 50th birthday. I am deeply grateful to be celebrating this important milestone. I made it!
Can spikey enough energy prices spill over into valuations of participants in things like patent races in energy-intensive businesses?
AI training seems pretty energy-intensive to me. But what do I know? I ain't nothing but a superannuated energy economist with a strange obsession with forests carbon banks as a kernel for the urgently needed carbon economy.
Happy birthday, young'un.
Happy Birthday! All the best.
Perhaps some day we'll have rational coherent policy and leaders who think through the consequences of their actions. One can dream.