Is the U.S. headed for another recession or already in one?
David “Danny” Blanchflower thinks so. The telltale sign? Plunging consumer confidence in the future. It’s called the six last recessions, the Dartmouth professor and former Bank of England policy maker warns in a new paper.
Blanchflower is well known for pinpointing the start of the U.S. recession of 2007–09 before most other forecasters and the Federal Reserve recognized the economy had fallen into that historic slump.
Read on the Bank of England website: Blanchflower’s 2008 speech in Edinburgh
The following MarketWatch interview has been lightly edited for clarity and length:
MarketWatch: You suggest the U.S. will enter a recession before the end of the year — if it hasn’t already. What is the single biggest piece of evidence to you?
Blanchflower: The best evidence for this is the new [consumer expectations] data we have published from the Conference Board for the eight biggest states: California, Florida, Illinois, Michigan, New York, Ohio, Pennsylvania and Texas.
By the spring of 2007 consumer expectations reached a peak and started falling. By December 2007 — the date called by the NBER Business Cycle Dating Committee as the start of the Great Recession — those numbers had collapsed.
In 2021 exactly the same thing has happened. Overall, these consumer expectations data, including from the University of Michigan, predict all six of the last six recessions since 1980.
It remains to be seen if a recession will follow, but [the consumer surveys] need to be taken seriously. They weren’t in 2007.
MarketWatch: You stress that “COVID-related fears and anxieties” lie behind the plunge in consumer confidence and that the pandemic could “derail the economy again.” How so?
Blanchflower: We have been trying to work out what might have turned expectations downward in the spring. Surveys by the Conference Board and Grant Thornton suggest that women in particular are fearful of returning to work and catching COVID.
In the last month the labor force participation rate of women ages 25 to 44 fell 0.7 percentage point. We also saw increased retirements. This looks to be a response to the rise of the delta variant and states not enforcing mask and vaccination mandates.
MarketWatch: Is fear of COVID one of the chief reasons there’s such a big labor shortage? People are too scared to go back to work?
Blanchflower: There is growing evidence that long COVID may be having an impact. Estimates from the U.K. suggest than one in eight people with COVID develop long COVID, which suggests perhaps 5 million in the U.S. This may well have a big effect on participation rates, but also on workers reporting in sick.
MarketWatch: Let’s say you are right. What do you think the White House and Federal Reserve should do to avoid or reduce the chance of recession?
Blanchflower: The Fed missed the Great Recession. There is talk of tapering starting soon, which makes no sense. Thankfully talk of raising interest rates any time soon seems to have gone on the back burner.
The Fed should follow closely any evidence of slowing, which has already been seen in consumer-facing PMI new orders and in auto parts and lending. If there are signs of slowing, then more quantitative easing and perhaps negative rates must be on the table.
MarketWatch: What is it going to take for the U.S. to make a full recovery, and how long is it going to take?
Blanchflower: That is a tough one as it is hard to predict the depth or duration of a recession. The big unknowns are the path of the virus and whether it mutates, as well as vaccine take up.
My concern particularly is that there will be long-run and unexpected changes in behavior. One possibility is that Americans will start precautionary saving. The buffer of cash they hold now may well be what is supporting workers leaving the labor force.
These are very uncertain times, with little or no historical precedent. The potential for the Fed to make an error is growing by the day. The concern must be that the U.S. enters double-dip, W-shaped recession that spreads around the world as the Great Recession did.
My advice would be ignore these sentiment data at your peril.