In the Harvard Gazette today, and interview with Frankel:
The latest University of Michigan consumer sentiment index shows economic confidence is at its lowest since November 2022. Also, hiring has cooled. Do these developments point to a recession or something like 1970s-style stagflation?
I think it is appropriate to worry about a recession coming within the next year. It’s much more likely than one would have thought a year ago.
I see five things going on that could logically lead to or worsen a recession. One is the trade war. The second is a stock market crash. The third is major cuts in government spending, assuming Musk and Trump manage to find genuine cuts. The fourth is a U.S. fiscal crisis because of a government shutdown, failure to raise the debt ceiling, or a downgrading by Moody’s, the credit rating agency. The fifth is a general increase in perceptions of risk. Risk is increasing because what Trump has done on tariffs and on government spending has been so erratic. It’s almost as if they’re doing everything they can to increase perceptions of variability and volatility and unpredictability. The uncertainty itself has a negative effect.
The instability has alarmed not just investors, but also sectors like real estate and health care, with many businesses shifting into “wait and see” mode. What are the implications for the wider economy?
If the uncertainty only lasted a minute, it wouldn’t have much effect, but it’s clearly going to last longer than that. Even if it takes a few months to resolve these issues, that could be enough to hurt employment and income and even to cause a recession. In the extreme, if all hiring stops for a month or two, that itself would cause a recession.
