A recession is inevitable, someday. However, the debate is about the severity of the recession and when it will happen. Will there be a soft landing or a hard landing? Scott Sumner has a great little post on his personal blog about this subject. He believes, in the end, there will be a soft landing and it won’t be soon. However, I don’t think so. I see Donald Trump getting revenge upon the world. More on that later.
But, Dr. Sumner is the Phd., so we should seriously take a look at his analysis:
Which of these statements is true:
1. Tight labor markets are almost always followed by recessions within a year or two (1966 was an exception).
2. Inverted yield curves are almost always followed by recessions within a year or two (1966 was an exception.)
3. The US has never experienced an expansion lasting more than 10 years.
Actually, all three are true. And none of the three have any necessary implication for current monetary policy. (Over at Econlog, I explain why I believe labor markets are currently tight.)
He goes on to say that the Fed should tighten if the first is true. He says the Fed should loosen if the second is true. And he says the Fed should throw up its hands if the third is true. Those are not absolutely economic truths, but are most likely true.
Dr. Sumner goes on to say that since there is no longer high inflation, or deflation, and I chalk it up to the new normal, there will be no hard landing and maybe no recession soon.
And he may be right. Sumner looks at the NGDP prediction market is up to 5.2 percent so he disagrees with history which says a recession is coming in the next 9 months. Of course, Sumner is not looking at credit crunches, tariff issues, deportations, labor shortages, corporate debt, etc. I don’t think those things can be ignored.
NGDP Change VS 10 Year Inflation Breakeven
One thing that will be interesting to learn is if this experimental market is able to avoid weaknesses that exist in other markets, such as mispricing or speculation. The NGDP cratered quickly, especially in 2007. The chart shows this with the blue line. We can from the above chart that inflation targeting did not alert the Fed as inflation was sustained through much of 2008 (the red line).
