Call me superstitious or contrarian — or maybe just a procrastinator — but I only started worrying about a recession last week. That was when one prominent commentator stated flatly that “there will be no recession in the next six months,” while the president of the Federal Reserve Bank of Chicago declared that the US was on a “golden path” to immaculate disinflation.
I can’t be the only person who thinks this feels like tempting fate, or at least another round of “Why Didn’t Economists See This Recession Coming?” headlines. More than that, however, these predictions seem both premature and hard to square with some of the data.
First, inflation is still high. It has come down from its 8.9% peak to 3%. But the US Federal Reserve has said it will not stop its contractionary policy until inflation is at 2%, so rates will almost certainly continue to increase.
There were always reasons to think the last remaining bit of inflation would be the hardest to vanquish. Some of that initial high inflation was transitory, caused by supply-chain disruptions, too much government spending, and post-pandemic spending. These factors have all moderated — and inflation has faded while employment has remained strong. What’s left is more entrenched in the economy: higher wages and prices for services. Reducing this inflation may take higher rates for longer, or even unemployment.
Consider that high rates have not yet worked their way through the economy, especially in such sectors as commercial real estate. Corporations and commercial real estate developers are still coasting on the low rates they got on their loans a few years ago. In the next year or two, however, both these sectors will have to refinance at much higher rates.
On the corporate side, some of these firms are probably just getting by on the low rates of the last decade — they won’t be able to survive higher rates and will close. Others may be in better shape but will need to contract (translation: layoffs) in a lower-demand, higher-rate environment. The picture looks worse for commercial real estate: Downtowns are still not full, and office and retail properties are not worth what they used to be. Once rates increase, some property owners may just walk away. This may not be a huge part of the economy. But it does have big implications for private equity funds, REITs, and, ultimately, pension funds.
