Would a slowdown in the rate of economic growth stop the rise in inflation?
Some economic forecasters predict a slower growth rate for the rest of the year. According to Neil Irwin, chief economics correspondent at Axios, this may be exactly what the economy needs. In his latest article, Irwin argues that if growth slows enough, it would allow the labor market, housing market, and goods and services markets to balance out with the rest of the economy.
While a slower growth rate would lead to lower inflation, it can also make the economy vulnerable to a recession. According to a National Association of Business Economics survey, more than half of respondents see more than a 25% chance of a recession and more than a quarter believe a recession will occur in the second half of 2023.
Irwin writes: “The risk of recession is real, but the decline in growth that forecasters are now seeing seems like a healthy thing.”
Marketplace host Kai Ryssdal spoke to Neil Irwin about what a slower rate of growth would mean for inflation and the prospect of a recession. The following is an edited transcript of their conversation.
Kai Rysdal: So look, here is your title. I’ll read it to you, then I need an explanation: “Economists Cut Growth Forecasts,” the headline says, “and that’s good news.” Explain, please.
neil irwin: So the economy cannot grow so fast without having inflation. Right now, what we have as an overheated economy, we have growth that has been very strong, 5.5% last year. And the economists who started the year thought it would keep that kind of pace going, maybe not as fast, but we could get 3% to 4% growth this year. They change that point of view, everyone downgrades their vision. But I think that’s the kind of thing that makes lower inflation more likely. And we’re going to sort of defeat this monster of inflation for now.
Rysdal: The catch, of course, as you pointed out, is that slower growth makes us vulnerable to a recession, especially, you say, if there are unlucky negative shocks. We don’t need more “bad luck” in this economy. What could these negative shocks be?
Irvin: Well, we’re seeing some of those, aren’t we – the war in Ukraine, the shutdowns in China, these are things that are already causing supply issues around the world and could escalate and unfold from many ways. Monkeypox, we just learned. You know the world is full of shocks, the world is full of bad things that can happen. The fact is that when growth is slower, when trend growth is slower, the economy is more likely to go into recession because of these shocks. As an example, in 2001 there was the dot com collapse, the economy was slowing down, sort of limping. And then the September 11 attacks happened in September. And that’s what made it a real official recession. It is therefore a situation where slower growth, a more “hampering” economy makes us more vulnerable.
Rysdal: We should point out here – well, I guess I’ll point it out since I’ve been saying it on this show for the last two weeks – that’s what’s supposed to happen. The Fed is raising rates, financial conditions are tightening, companies are rethinking things and we are supposed to slow down a bit.
Irvin: Yeah, I mean, look, you just can’t grow at 4% to 5% forever, because of demographic trends, because, you know, technological advancements only happen so fast. And it’s one thing when you come out of the recession and then put people back to work after the pandemic. All these people who left the labor force came back. But eventually you run out of those people and then to achieve higher growth you need the resources to come from somewhere. And what we’ve had in recent months hasn’t been that kind of strong, robust growth, but just a lot of inflation. And that doesn’t make anyone happy.
Rysdal: Let me take you a little aside. Back when inflation was still in the future – and I’m talking about a year and a half ago – everyone was like, ‘Oh my God, can we talk to each other about inflation? ” So here is the other side of the coin: can we get into a recession? Can CEOs be so worried about the possibility of a downturn that they preemptively cut capital spending and hiring and that sort of thing and make it worse, I guess?
Irvin: It’s definitely a risk, right? There is definitely a change in sentiment among executives. You know, you look at CFOs, surveys, things like that, which can affect hiring plans. You know, for now, what, for example, the Federal Reserve wants to see is that this economy gets back to some balance by hiring levels, by slowing down and by not having so many layoffs, but less hiring. That said, it’s also true on the consumer side, the stock market is down sharply this year. And so if you’re planning on buying a house, if you’re planning on spending lavishly on that vacation, maybe you’re canceling those plans because your stock portfolio is down 20%. These are the kinds of things that are the ways in which financial markets can affect the whole economy.
Rysdal: All right, so let me embarrass you a bit. Do you think Jay Powell can get us to that soft landing? And I’ll take a discursive answer as opposed to a hard yes or no, you know, because it’s all about subtlety, isn’t it?
Irvin: It’s like I’m optimistic. I think that’s plausible, I think there’s a path to a few quarters of growth. It’s more in, you know, the 1% to 2% range rather than the 4% to 5% range, and supply chain issues can be resolved and the labor market can find a balance without the kind of mass layoffs and the like you see in a recession. At the same time, it’s such a narrow airstrip. It’s such a delicate task to try to bring this economy to that very delicate balance of slower growth, less overheating but not outright contraction.
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