The initial second quarter GDP estimate dropped. For economic news consumers, the back to back negative quarters signaled a recession has begun. Just prior to its release, the White House began a quick top-down campaign to redefine a word (recession) to help their messaging. Media figures took their cue from the White House and quickly rolled out a message that it was not quite a recession but it did portend an ominous possibility of a recession. Possibly the most ludicrous example of this was the NY Times guest op-ed on the Vibe-cession. We are in one.
It is a weird one because it is different from recessions of the last forty years. Recessions in the first half of the 20th century and even up to 1970 were a problem of supply and demand mismatch with inventory build-ups. Employees were laid off as firms produced less to work off their inventories, and once numbers were kosher, employees would come back. This held for decades until the 1990 recession, which some call the first of our newly financialized economy. Those recessions were called jobless recovery recessions. That type sank Bush 41 in ’92. Our economy ran out of new borrowers, credit stopped expanding, and when layoffs occurred, off-shoring limited how many people came back. We were no longer a manufacturing and resource extraction based economy so the bounce back was different.
There is a hole here in my recap as I skipped the 1970s. Those recessions and growth were different but more applicable to today. In 1971, President Nixon closed the gold window. This caused chaos in the currency markets. Input costs jumped and it took time for the oil exporters to figure out they were getting screwed. The oil embargo is always associated with Arab-Israeli wars, but it also had a deep financial rationale. The oil exporters were getting dollars that were not worth the old exchange rate for gold and felt that they were being screwed. The embargo was a punishment for oil importers and a means to collect more of the oil rent. This decade long process was an era of growth but punctuated by short recessions.
The 1970s was also a period of input cost and labor cost inflation. It was the last time the US had experienced a cost push spiral that caused inflation to wreck expectations, spending habits and yes, vibes. Whip Inflation Now buttons were real. Polyester clothing was not just style but to move away from cotton, which had skyrocketed in the ‘70s. President Carter cut government spending. Inflation did not end until FED Chair Volcker pushed the FED funds rate to all-time highs. Volcker destroyed demand to wring inflation out of the economy. He had to do it to keep the dollar credible in the global markets. The federal government was pressured to issue bonds in foreign currencies, and America’s elites could not allow this.
America is at a similar juncture. Covid was a shock. We did not really have a recession in 2020, even if it technically was. We experienced a huge shock like the oil embargo and the economy had to collapse to a lower activity level. It bounced back quickly as states re-opened. America also pushed through trillions in spending, which became a corporate bond bailout. Trillions in dollars were shoveled to citizens via direct or indirect means to flood the system with money. Supply chain disruption caused a reduction in goods sent to the market. Inflation is simply these dollars chasing fewer goods. Each government spending bill pushes more money into the system, hurting any chance at finding a steady-state.
The vibes are all bad. This op-ed was originally a substack post in June. Even the Times is mining content from the minor leagues. The vibes are off because no one under 50 has any memory of what the ‘70s were like. Even in recession, outside of the 2008 crash, most recessions see unemployment jump a few percentage points. Instead of 95% of people working 98% are. Activity can drop, but it is hard to see a 2-3% drop in economic activity. For many, it will not feel like a recession. Does not mean it is not real, but Kyla is right that it’s a vibe, man.
America is likely to muddy along with some quarters of growth and some of contraction (risk of a severe recession is still alive). That’s what the redefinition is about. They know there will be a bumpy ride creating bad vibes, so if they can eek out a 1% growth quarter in Q3, it means no official recession. Trust the experts. This can calm the vibe in some. You can hear Joe Biden pitching it. See kids, we are not in recession! It’s just 1% growth. It’s a slow growth model. It’s a little stagnant. With the inflation you see, yes, it is stagnation and inflation. Stagflation if you will.
They’ll redefine that, too.