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Are We in a Recession? What Will It Look Like If We Have One?

Slides for the "current macro situation" talk...

The Fed Has Started Cutting Interest Rates:


  • From the 1960s through the 1990s, we had recessions when the Federal Reserve said "uh-oh; inflation"
  • The recession of 2001 was the first in a long, long time not brought on by a steep upward push of the interest rates it controls by the Federal Reserve to curb spending and inflation
  • The potential unpleasantness of 2008 may be the second such

The Construction Sector Is Collapsing:


  • When the dot-com boom collapsed at the start of this decade, the Federal Reserve lowered the interest rates it controls far and fast
  • The hope was to keep employment and production from falling much: if we can't put people to work in high-tech and spend money investing in the internet and allied industries, perhaps low interest rates can spark a construction boom * It worked--really well (perhaps too well)
    • Construction joined as a leading sector of spending and employment by
      • Defense
      • Commerce--side effect of "selling" "political risk insurance" to rich foreigners and to foreign governments
  • Now the construction boom has collapsed--without the Fed hitting the construction sector on the head with a brick
    • Construction not coming back soon: 2 million extra houses...
    • Financial uproar
  • What could take up the slack this time?
    • Exports? And import-competing manufacturing?
    • Medicine?

What Is Happening Right Now?


  • We do not know
  • Standard payroll-employment series tends to go awry when economy changes its phase from employment expansion to employment contraction
  • And the economy does change its phase
  • Household employment survey a better guide at turning points
    • But a lot of noise in household employment survey
  • The problem of the anemic employment recovery of the 2000s
  • The labor market has not changed its phase--yet--as far as we know


  • The fact that we undergo a half-sized business cycle every year what with Christmas, etc., makes reading the tea leaves on these particular months especially... complex...

The Federal Reserve: Stuck Between a Rock and a Hard Place:


  • The Federal Reserve
    • Doesn't want to lose its price-stability credibility by cutting interest rates too far too fast and igniting inflation--both by misjudging domestic demand and because cutting interest rates means a cheaper dollar hence import price inflation
    • Wants, in fact, to raise interest rates--to make feckless over-leveraged financial institutions pay rather than to bail them out
    • But doesn't want to hold the entire economy and the jobs of millions of Americans hostage in order to make sure a few mortgage loan originators and packagers get their just deserts
    • Good luck to Bernanke and company...