Why's It So Hard To Predict A Recession?

of a full fledged downturn. It's not looking very good. It's it's looking pretty ugly in the next year or so. Bloomberg Economics sees the benchmark interest rate rising to almost five percent by the end of and near certain in recession during that time. I would stick with my view that a recession this year is more likely than not. The general consensus to answer your question is it's either

a mild recession or a soft landing. It is saying recessions coming, it's saying recession is not opening now, but a recession coming in. But predicting the direction of an economy that is so huge twenty six trillion dollars is not so easy. My colleague Katya Dmitrieva in Washington writes all about the U. S. Economy, and she's here with me now to explain. Kandya, you've just written a story that shows why economic forecasting is such a tricky business,

why it's so hard to predict a recession. Can you describe what you were trying to find and what you're reporting shows. Yeah, I was trying to find whether we're going to head into a recession, like all the other economists and market watchers out there right now. So the good news is that there are a lot of different ways of measuring the economy and whether we're actually slipping into a recession. The bad news is that it still really is more of an art than a science. Exactly

what do you mean by that? Like with anything in the economy, there are so many different components to it. You have consumer spending, you have corporate investment decisions, You have all of these moving parts and they don't all move at the same time, especially right now, especially in this weird kind of economy we're in right now where the pandemic happened. Would still argue that we're in that

recovery phase. You know, a lot of the data is still out of whack, i should say, and economists and market watchers are really struggling to unpack even the trends, even the trajectory. So if you take the labor market as one component, you know, as one of the puzzle pieces that go into this broader image of the economy, even that itself right now is not very clear. So

you have within the labor market itself different signs. One thing will show you like the unemployment rate will show you that the labor market is at a half century level of tightness. You look at another indicator, looking at the sector of temporary help in the labor market, and that has now declined for several months in a row. And that's usually a component that's an indicator of whether a recession is coming, because that's the segment of the

market that's like first fired, first hired. So economists will just tell you we don't really have a clear answer from that. We don't have a clear message from even the labor market itself. And so that labor market, of course is one of the really big traditional indicators. You in your story went beyond those big end hitters that everyone looks at to look at ones that maybe people don't think about. So let's talk about some of them.

One of them that stood out to me was even looking at things like restaurant reservations on apps like Open Table and hotel reservations. How are they able to add that to this, as you say, picture of the economy. These were all new indicators that popped up during the pandemic, and so now they're using them instead of to track the economic recovery from the pandemic, they're using them to track perhaps growing signs of a recession. You know, are

people uh in restaurants? Are people coming back to kind of in person gatherings. Now that's a sign of consumer spending. So are people going out to spend their money on food and drinks. A few of the other things include mobility data, so are people moving around office occupancy vacancy rates? Are people coming back to the office, and if you're in the office, you're going out, You're going to a lot of restaurants or places to buy your lunch, So

that's additional spending into the economy. These are all things that economists are still looking at to track what's happening. And there are also kind of some weirder ones. Let's have it. Uh, plastic surgery is one. Yeah. I spoke with one economist who is adamant that plastic surgery spending is probably the best tracker of discretionary spending because think about it, like, you don't need plastic surgery, you spend

it when you have a lot of extra money. And so after the pandemic sort of two, there was a boom in in plastic surgery. And now in the past month or so, this economist tells me there's been a bit of a pullback in that activity. Like so many of these other indicators were coming off of a high. So the past year year and a half, we had so many companies hiring excessively labor, hoarding for plastic surgery. We had a boom in procedures. You know, people maybe

are own zoom, they want to change something up. But now we're coming off of the high. And so the question I think is is that a sign of a moderation and it slowed down and it returned to normal, or is this the beginning crack of a recession that's really just gonna get wider. Another thing that people wouldn't immediately think about is lipstick. That's right, Yeah, this is a favorite one because in a downturn, people stop spending on very big ticket, brandname item. So let's say you

want to buy something Chanel. You wouldn't buy a Chanelle person anymore, but you still want to have that luxury, so you're gonna buy a Chanel lipstick. So you're gonna swap out your spending. And does that actually happen? Like, are their data to show that, say, Chanell handbag sales go down, but Chanelle lipstick sales go up. Not for a few decades, but it certainly was the case before. Okay, so this is like an old favorite that mean that's right? Yeah,

it's the same with men's underwear sales. Sorry, that came out of the blue men's underweal as song as we went there. What are you talking about? Yeah, it's a basic rights, not plastic surgery. You kind of have to have it. I imagine you buy it whether the economy is good or bad, if you need it. So how is that an indicator? In very bad times you tend

to delay your purchases. So for example, instead of buying brand new underwear, you might hold off if some of your underwear has a rippen it if you're in a recession or very bad times, you just lost your job, You're just going to keep holding onto it. We're joking around about it, but former Federal Reserve head Alan Greenspan tracks this stuff. He tracks the sale of men's underwear as a real indicator of consumer spending and potentially economic

growth or you know, a potential downturn. I think it's more of um, one of the many things that some economists would look at to sort of gauge are we sort of at the bottom of a recession right now? There really are little signs of that. So luxury sales are still elevated. For example, Um, we still have class sick surgery happening at levels not seen pre twenty nineteen,

but it's just moderating. So these are things that they're watching for, not things that they've necessarily seen start to happen, which would indicate a recession, but just like a little bit of a downturn, and then they want to watch

it for a while. That's right. That question gets at the really tricky thing with recession prediction, and that tricky thing is that it's usually impossible to predict exactly when a recession will hit you can see signs of it, you can see a trend, but it's really difficult with any certainty. One of the most scientific measures is the

some rule developed by former Fed economists Claudia Palm. Essentially, it's if the unemployment rate, this is the main U three rate we track, and every single monthly jobs report, if you see the three month moving average of that take up oh point five percentage points above the previous twelve months low, then a recession has probably already started.

And what's it showing now? That model shows that there is no recession right now, and there is no recession in the I mean foreseeable future because the reading is so low. If you look at the chart online, it's still pretty much close to zero. So some of these indicators are forward looking, right, So some of these indicators you can look at and say, Okay, in like three months to six months, we will probably have a recession.

Some of them are in the moment, Like the Sam rules is a great indicator of where we are right now, right the second and so any one thing. You know, we're joking around a little bit talking about lipstick in underwear, but people kind of have their favorite things that they watch. But Trying to peg a recession to anyone or two or even three things is not really going to be your most accurate way of doing it. You need sort

of to take all of these components together. And I think that's why, especially since the pandemic, I think economists have realized that they need as much data as possible because some of these issues start to form in parts the economy that you may not have thought about or may not have seen before. You know, the last two recessions really caught a soft guard. They were kind of

unforeseen events, black swan events. Right, you had the COVID pandemic, and then prior to that you had this massive, spectacular housing crash starting in the credit market. And so I think taking, you know, as much as you can fill your basket with different components and different items, you'll get a much clearer picture of what's happening in the economy and if potentially a downturn is coming. Godya Dmitrieva, thanks so much for talking with me today. Thanks so much.

When we come back. How economists decide when a recession has arrived, So, as Katya says, given how hard it is to tell the future, how do policymakers decide whether to titan or loosen the reigns on the economy. One person who knows is Simon Kennedy. He oversees economic coverage for Bloomberg and he's here with me now from London. Simon. We've been talking about how difficult it is to predict when or if a recession will happen. But what measures

do economists used to declare that a recession has arrived. Well, there's two measures. One is the internationally recognized definition of a recession, and that's two quarters in which the economy contracts, in which gross domestic product, which is all the output of an economy, shrinks over two quarters. But in America

it's slightly different. Obviously, we get those measurements, but an official resignation is defined by a group of academics at the National Bureau of Economic Research, which assembles this panel. Ben Bernankee, who used to run the Federal Reserve, was once on that panel, and they look at a wider amount of data. They look at things like a labor market and data and the like, and they then report the start of a recession and the end of recession.

But they do so a long time after the event, it can be up to a year even longer perhaps, in which they crunch the numbers and then they almost like tablets of stone coming down a mountain, declare that a recession occurred starting this state, which by then is obviously a lagging indicator to some extent, the sense though that two quarters of contraction is internationally recognized, and then the NBARE panel come back a bit later and rule it.

So it is that why some academists say, even though we haven't been officially declared to be in a recession, they kind of think we may already be in one now. They will only find out later. Absolutely, And you've seen cases going back to the financial crisis in which actually the recession then was started much earlier than the data

initially showed. And now the feeling is is that if the US isn't in a recession now, it might soon be, based on the forecast based on the huge amount of interest rate hikes that the Fed has delivered in the past year, and this would be more of a I guess running the mills sort of traditional recession, is there, right? Yeah, And there's the the old joke that the Federal Reserve has has murdered several expansions over the centuries and or over the decades, and again it seems that bad news

for Chairman Jerome Pow. But this would be made by the FED recession to squeeze the inflation out of the economy. That obviously, as prices surge last year, the FED was a bit surprised. It had to catch up with that and heighted interest rates quite aggressively last year. Um is now continuing hypely interest rates, but but perhaps at a slower pace. But the more it squeezes now, the greater

the chances of recession. And and then it said it's a hard act to pull off this soft landing where the economy slows down enough to control inflation and then takes off again very rare feet rarely ever occurs. The FED would like to think it can do it, but obviously the majority of economists think it would. One of the things that's also different about what we're seeing now is that inflation. Of course, it's high, we're all feeling that,

and yet the job market is still pretty hot. We see a lot of big layoffs from the tech sector that are getting headlines, but there are still a lot more jobs available than people who are willing to fill them, and that's providing a nice buffer. And for those who don't think there's going to be a recession this year, and there are economists out there Morgan Stanley, Goldman Sacks take the other side of the bet and don't think there's a going to be a recessional that the risk

is smaller than most. They point to that labor market, they point to unemployment being solo. Obviously, if you're in a job, you're getting paid, that helps your your ability to spend and keep spending. It bolts up your your savings. So I think if there is a recession or not, the hope is that it will be at least a mild one because so many people are in work, because there's such so much demand for labor, we'll be right

back after the break. So, I mean, how likely do you think it is that the Federal Reserve could manage to cool off the economy without tipping into recession, this fabled soft landing. So I think we've started two thousand and twenty three on quite a stronger or stronger footing than perhaps anticipated at the end of last year. Two things behind that, the reopening of China is going to

create a source of demand around the world. And at the second time, inflation has come down, perhaps slower than expected. It has potentially peaked in the fall of last year. And if inflation comes down and demand is supported, the Federal Reserve feels it can take its foot off the brake, so to speak, that there will be more chances of a soft landing. Certainly in recent weeks that the chatter

around a soft landing has built. The tight labor market means workers have been able to demand higher pay and other benefits. If the Fed succeeds in cooling the jobs market and unemployment rises, do you think that that balance of power will shift sharply back toward employers. I think that's probably going to be a theme for the year. It's hard for Jerne Power at the FED and other central bankers to communicate because who wants to go out there and say, we really need unemployment to go up,

we really need your wages to stop rising. Um. It's not a great look. It is a look that if you're the central banker, you have to adopt at the moment. The argument would be from their point of view is if we is that the bigger threat to the medium to your long term lifestyle is inflation. So we need to get that back under control, and that would allow the labor market to to sustain growth over a much

longer period of time. But it's a hard message to convey that actually, when you look at it, um, central bankers wouldn't mind that labor market easy enough a bit. And what about the other side of the equation, which is corporate profits which have been really really high um. And you know, there's some debate about how much corporate profits are contributing to inflation versus how much it's the

hat labor market. Are you anticipating that we're going to see these very profitable companies start to cool themselves to some extent, although when we voluntary, I don't know many companies that that try to to reduce their profits. But again, you were entering a space really where if you're the Fed, there's some there's somewhat of a risk here that you're going to be pulled into the political conversations on Capitol

Hill because of the forces. You talk about workers wanting more wages, workers feeling they've got they've got or they had a small window to uh to kind of cash in and push for higher wages because they're in demand. The argument that that corporations are profiteering and taking advantage of a moment to boost their own balance sheets. So

you've got all these forces out there. That puts the federal as a been a bit of a tricky position because if it's the one that's on the hook for causing the recession and companies are profiting and workers are missing out, then then it's a bit of a hard conversation to be having with the American public. I'm gonna put you in an unfair spat. Looking down the road to the rest of the year, do you think there's

going to be a recession? I think so. I think the interest rates were yanked up so aggressively last year that it will be hard for any economy to kind of withstand that squeeze. The inflation at the start of last year that everyone thought would fade, the idea that even eighteen months ago, the bet was the inflation would fade after the pandemic faded, and then there'd be this opportunity for the Federal Reserve to not have to raise

interest rates aggressively. That proved a wrong bet, but inflation has continued to gallop along. Interest rates have been squeezed um and aggressively, so the most in four generations. It would be very hard or very easy, i should say, for the economy just to tip into a into a brief recession, which seems to be the consensus forecast and most But as long as that labor market stay strong, there's a case to be made for no recession, or at least a mild one. Simon Kennedy, thanks for talking

with me today. Thank you. You can read more from Simon Kennedy and Katya Dmitrieva at Bloomberg dot com. Thanks for listening to us here at The Big Take. It's a daily podcast from Bloomberg and I Heart Radio. For more shows from my heart Radio, visit the i Heart Radio app, Apple Podcasts, or wherever you listen, and we'd love to hear from you. Email us with questions or comments to Big Take at Bloomberg dot net. The supervising producer of The Big Take is Vicky Bergolina. Our senior

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