How deep will the US recession really go? A Reuters survey in December 2022 saying that the recession would be relatively short and shallow.
By
ARI KUNCORO
·6 minutes read
SALOMO TOBING
Ari Kuncoro
Last week, International Monetary Fund (MF) managing director Kristalina Georgieva said that a third of the world would experience a recession in 2023. The reasons were the ongoing Russia-Ukraine war, high commodity prices, the resurgence of Covid-19 in China, and higher interest rates in the United States.
World economic giants the US, Europe and China will slow down. Those countries not experiencing a recession will feel the impacts through the global supply chain, such as a slowdown in exports and/or an increase in import costs.
Georgieva’s statement was greeted by the drop in the world oil market, with West Texas Intermediate oil prices falling from US$80 to $73 per barrel.
Seeing the inconsistency of the US’s macro data, an interesting phrase is also expected. The 2023 recession is expected to be the size of an ocean but only ankle-deep (shallow recession). The recession in the US is not expected to last too long, mainly due to changes in consumer behavior in terms of aggregate demand. This will have a global impact, because the US is still the locomotive of the world economy.
According to Alan Greenspan, former chair of the US Federal Reserve in 1987-2006, a recession will still occur because the Fed wants to improve its credibility in controlling inflation, as it had been too slow to raise its interest rates previously. Fulfilling the recommendation that the Fed moderate its benchmark interest rate hike to avoid a recession carries a risk, because it would be seen as an attempt to protect only the capital market.
It is inevitable that the US capital market will be affected. These expectations have been confirmed ahead of the next Fed meeting on 31 Jan. to 1 Feb. The DOW index fell 300 points in anticipation that the Fed would remain hawkish in light of the latest US jobs growth data, which was still good.
A recession will still occur because the Fed wants to improve its credibility in controlling inflation, as it had been too slow to raise its interest rates previously.
The question is, how deep will the recession really go? A Reuters survey in December 2022 of 48 leading US economists offers an interesting insight, with the majority of respondents, or 35 out of 48 respondents, saying that the recession would be relatively short and shallow.
Rating institution Moody's calls this phenomenon “slowcession”, not a recession. In this scenario, growth may slow. Inflationary pressures fall, but will still be high above the ideal rate of around 2 percent annually. According to the survey above, 60 percent of respondents predicted that if a contraction occurred, it would not be deep.
Several leading indicators show that recession has already started in the US. Home sales since February 2022 have seen successive contractions. The manufacturing purchasing managers' index (PMI) has entered a contraction zone, dropping slightly below 50 since November and dropping again in December to 46.2. Apart from these signs, however, several other indicators still show economic vitality. Surprisingly, annual economic growth in the third quarter of 2022 stood at 3.2 percent, increasing from the two previous, consecutive contractionary quarters of minus 1.6 and minus 0.6 percent.
In the run-up to a recession, long tenor bond yields usually become lower than short tenors due to increased uncertainty. This phenomenon is called an inverted yield curve, which has been flashing a warning light since March 2022 on the interaction of various factors, such as the pandemic, geopolitical crisis, food and energy crises, and the Fed’s behavior (Jacobs; 2022). However, due to high growth in the US economy in the third quarter and the complexity of the various factors mentioned above, no less than the term’s inventor himself, Prof. Campbell Harvey from Duke University, doubts the accuracy of the timing of this indicator.
Demographic factors
Public consumption is the culprit that made the early indicators of a recession in the US inconsistent with one another. Data from the third quarter of 2022 show that spending on health and other services had compensated for the decline in consumer spending on durable goods, such as vehicles and electronics.
The year 2022 was the worst year in a decade for US auto sales, which fell 8 percent from 2021. In compensation, demand has been stifled during the pandemic and revenue not spent on durables was used to buy services, including dining out, travel and other services, resulting in a growth spurt.
There is a hypothesis linking this to a new demographic phenomenon, namely the large number of adult children returning home to live with their parents. The causes are the high rent for apartments and houses, delayed marriage, and pursuit of postgraduate education during the pandemic (Pandurangi; December 2022).
Recent US population data showed that 48 percent of adult children were back living at home with their parents, as was the case in the 1940s. Living at home can save on daily expenses so that disposable income can be used to buy luxury goods, such as expensive watches, jewelry, fine dining, and cruises.
According to the IMF forecast above, one-third of the world's countries will be experiencing a recession this syear. If a recession is defined as two consecutive quarters of negative growth, the remaining two-thirds are expected to experience only a “slowcession”, or might still be able to stay on a long-term growth path with the right policy combination. In dynamic mathematical terms, they can still stay on the saddle points, so named because even when galloping, walking slowly through a puddle, or jumping over obstacles, a horse can still be controlled as long as the rider is reliable.
The national economy’s capability in surviving a recession is in its excellent growth performance in 2022 in the mobility sector. This precondition increases Indonesia’s chances of remaining at saddle points with a steady growth state of around 5 percent per year.
The revocation of the public activity restrictions (PPKM) marks a policy shift towards maintaining mobility-related growth sources.
Indicators from the production side also give hope. The manufacturing PMI index increased to 50.9 in December from 50.3 the previous month. On the demand side, the consumer confidence index remains in the optimistic zone at around 120.
ARI KUNCORO,is rector of the University of Indonesia
This article was translated by Hendarsyah Tarmizi.
