Opinion: Don’t be fooled, the Depression is really coming

Editor’s note: Lakshman Akoothan and Anirvan Banerjee are co-founders of the Economic Cycle Research Institute (ECRI), which maps recession dates for 22 economies around the world. The opinions expressed in this comment are their own. View more opinion on CNN.


Recession fears are running rampant in the United States these days. However, some economists argue that the strength of the labor market — as well as household balance sheets — will keep the economy strong enough to avoid a recession.

Lakshman Achuthan

Anirvan Banerjee

We do not agree. Despite the relatively strong job growth we’re seeing, the Economic Cycle Research Institute (ECRI), which we co-founded, has been forecasting a recession since last spring, and we still expect the US economy to enter a recession this year. .

After getting off to a late start, the Fed has been raising interest rates since March of last year, and very sharply since June, in an effort to slow the economy and calm inflation. The problem is that by the time the Fed started raising interest rates, the economy was already slowing, making a recession more likely.

The commodities sector is particularly vulnerable, in part because it is sensitive to rising interest rates. Symptoms of this vulnerability are already showing in the drop in factory orders. It has already been attacked by rising mortgage rates, residential construction spending has fallen since last spring, housing construction and new building permits have fallen.

Meanwhile, the manufacturing PMI, which measures the month-on-month change in manufacturing activity, has fallen below 50 in the past two months, indicating that the manufacturing contraction is on its way to contracting. Moreover, the equivalent in the services sector also fell below the 50 mark, which indicates that the services activity has begun to decline.

Recessions always result in significant declines in both GDP and jobs, but such declines are not necessarily evident at the start of a recession. While GDP and jobs align with the economy, by the time they are released, they only tell us where the economy has been in the recent past.

Employment, in particular, could hold out longer than expected in a recession scenario. This was true around the 1970s inflationary era. Notably, employment did not peak until eight months after the onset of the severe recession of 1973-75.

The reluctance to allow employees back in the past, and in today’s economy, may be due to the “money illusion,” whereby business owners tend to view their revenue in nominal dollar terms rather than recognizing its true value, adjusted for inflation. So even if their revenue goes up in dollars, the purchasing power of those dollars goes down because of inflation, buying less labor and raw materials.

In fact, in recessions, inflation-adjusted revenue declines anyway, as customers make more or less purchases that cost them more because of inflation. Inflation also forces business owners to pay more for everything they buy, including employee wages and salaries. As a result, their earnings shrink, which is why many end up doing layoffs.

We saw a mirror image of today’s economy in the spring and summer of 2008, when the Great Recession, which began in December of 2007, was already beginning. At the time, not many — including then-President George W. Bush — were worried about a recession because GDP had not yet declined, even though job losses had begun. We disputed the prevailing complacency, writing to CNN at the time, “While GDP has not yet fallen, we have already seen four consecutive months of job losses on the payroll. That suggests the economy is on a recessionary path.” It means that one or both of the slightly positive recent GDP estimates will be revised down to negative readings by next year.”

A true recession entails job losses – sooner or later. That’s why—after predicting the economy would enter a recession—last spring, we urged job seekers to “update their resumes and make any career moves while the job market is still hot.” Since then, we’ve already seen job losses in tech and finance, but more are to come although the monthly job numbers still look pretty good.

Our recession forecast hasn’t fluctuated. We must all be prepared.

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