A Smorgasbord Recession? (Wonkish)

https://www.nytimes.com/2018/09/19/opinion/a-smorgasbord-recession-wonkish.html

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The 2008 financial crisis is (duh) a decade in the past; employment has been growing steadily since early 2010. Since nothing is forever, and proclamations that the business cycle is over have always ended in embarrassment, lots of people are looking for the sources of the next recession.

The thing is, there’s nothing out there as obvious as the housing bubble of the mid-2000s, or even the tech bubble of the late 1990s. So here’s my thought: maybe the next recession won’t be caused by one big shock but instead by the combined impact of several smaller shocks. There are arguably several mid-sized bubbles out there, from private equity debt to emerging markets. Stocks are priced as if there’s no risk despite omens of trade war, consumer confidence similarly seems to discount dangers. There’s probably other stuff I’m missing.

The point, anyway, is that we might be looking at a smorgasbord recession, one that involves a mix of smallish things rather than a single dominant item. And there’s a model for that kind of recession: the slump of the early 1990s.

Most modern recessions have had clear narratives, at least after the fact. The 79-82 double dip was about the Fed tightening to bring inflation down; 2001 was about the tech bubble; 2007-2009 about the housing bust and the financial crisis it triggered. But I’ve been reading various accounts of 1990-91, and they’re kind of amorphous.

One piece was a boom and bust in commercial real estate, partly connected with the savings-and-loan crisis and aftermath, which led to a sharp drop in nonresidential construction:

Another piece was a drop in consumer confidence, brought on by oil price hikes and Gulf War jitters:

Yet another piece was the post-Cold War drawdown in defense spending:

So, no one overarching narrative, but the combination was enough to cause a recession. It was a fairly brief, shallow recession compared with the big slumps of 79-82 and 2007-9:

But recovery was sluggish and for a long time jobless, with unemployment continuing to rise long after the official end of the recession:

So here’s my hypothesis: the next slump won’t be a big bang like 2008, it will be a smorgasbord recession like 1990-1, the cumulation of a bunch of medium-sized issues.

You might ask why multiple issues should strike at the same time. The answer, in two words, is Hyman Minsky: after a long period of stable growth, lenders and investors get complacent, and the private sector overreaches.

If that is what happens, we should expect another sluggish, jobless recovery like that after the 1990-1 and 2001 recessions, except probably worse. Why? Because monetary policy is much less effective in reversing recessions brought on by private overreach than it is in reversing slumps brought on by previous tight money.

And we’re likely to have a big problem with the zero lower bound. The Fed cut rates by around 5 percentage points in the face of the 1990 recession, and still got a jobless recovery:

This time around the Fed doesn’t have 5 percentage points to cut — it only has 2. And no, that’s not a reason to raise rates faster, to make room for later cuts; it’s a reason to not raise rates until inflation is significantly higher, and hope that we’ve gotten to 3 or 4 percent before the smorgasbord attacks.

So those are my current thoughts on the next recession. When will it happen? (Looks at watch.) Actually, I have no idea. But it would be really strange if it doesn’t happen within a few years at most.

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