A year ago, many economists predicted that the US was headed for recession. But in the course of 2023, those same economists have become increasingly optimistic about the prospects of avoiding a recession. Recently, even “Doctor Doom” Nouriel Roubini, who famously predicted the ‘08 crisis, declared that the US will either experience a mild recession or no recession at all – a so-called soft landing. A year ago, he characterized this same view as “delusional.”
A year ago, there were good reasons for Roubini’s view: the highest inflation since the 1970s led to the Federal Reserve raising interest rates at the fastest pace in 40 years. The effect of stimulus measures in 2020 and 2021 was petering out and global economic insecurity was aggravated by the Ukraine war. By the start of 2023, manufacturing, still an important part of the American economy, was slowing down markedly. It has contracted for eight straight months.
Then in the spring, several major banks collapsed including SVB, the bank of high-tech venture capitalists. This had the hallmarks of the beginning of a financial crisis, which is often the harbinger of a recession. It exposed massive problems with devalued bank assets (especially long-term Treasury bonds) due to interest rate rises. One estimate, probably way too low, was that there were a total of $620 billion in “unrealized losses” on bank balance sheets. The Federal Reserve and Treasury went to panic stations and stepped in with a massive bailout. Even though this succeeded in steadying financial markets, this crisis pointed to a potential credit crunch where businesses and individuals would find it much harder to get a loan which would help trigger a recession.
And yet, during the spring and summer, a recession did not materialize. Why?
There are a number of factors both international and domestic. The world economy did not experience as sharp a downturn as expected, despite massive inflation and debt crises, especially in a number of neocolonial countries. The warmer winter took the edge off the projected energy crisis in Europe.
In the US, virtual full employment sustained demand. Employers were reluctant to lay off workers they had a hard time finding during the Great Resignation in 2021. The tech industry has been an exception, with significant layoffs in a number of companies. Inflationary pressure eased somewhat although it is still hitting working people hard with continuing rent increases and the sharply rising cost of eating out as two examples. Demand was also boosted by pandemic-era stimulus checks (long since spent) and higher savings for part of the population who were able to work from home. On top of that, child tax credits temporarily cut child poverty by 30% while the moratorium on student loan payments helped millions.
Consumer spending accounts for 70% of economic activity in the US. American consumer spending has also played a significant role in the world economy over the past several decades, helping to soak up excess capital. This spending is maintained by the massive extension of credit. Capitalist commentators kept pointing to the “resilience” of the American consumer as the crucial factor pointing away from a recession.
Recession Looms Again
In the past month a lot of data has come out that is beginning to raise the specter of recession again. A widely reported study by the San Francisco Federal Reserve Bank states that the savings of 80% of the population have been exhausted. Pandemic-era programs have ended, and, as of October, people have to start repaying student loans. Credit card debt has hit record levels, even higher than before the 2008-9 crash. It is also reported that sales are down at some key retailers. As a Business Insider headline states, “The U.S. Consumer Is Starting to Crack.”
In addition to this, a major crisis looms in commercial real estate, due to a massive drop in occupancy, partly the result of remote working. This could cause the financial crisis to resume as a number of banks are deeply enmeshed in this market. The housing market is also beginning to be affected by higher mortgage rates. In general, there is a lag time before the economy feels the full effects of higher interest rates. The lag time may have been extended for particular reasons but the effects are starting to show.
Meanwhile, there are significant international developments pointing towards a deeper crisis, particularly in China, the world’s second-largest economy. The country’s property sector, accounting for 30% of the economy, has been in a slow-motion free fall; manufacturing is slowing down; and youth unemployment is at 21%. There is also evidence of deflation, a general fall in prices, even more dangerous than inflation.
Paul Krugman, a leading liberal economist, claimed that this was probably the “08 moment” in China, but that somehow this would have little effect on the world economy. This is clearly ridiculous since the main trading partner of so many countries is now China. The effects are already being felt in East Asia and beyond, including in Germany whose economy is already in recession. But maybe Krugman meant the US when he said “world.” While the effects of a major crisis in China on the American economy are hard to calculate, it clearly would have an impact.
The Switzerland-based Financial Stability Board recently declared, “The global economic recovery is losing momentum and the effects of the rise in interest rates in major economies are increasingly being felt.” The U.S. will not escape these effects.
What It All Means
Trying to predict the exact timing of recessions is often very difficult because of the range of variables involved. Capitalist economists have a vested interest in playing down the dangers to their system. But while the situation clearly points towards a downturn, we can’t yet say how deep that downturn will be.
What is clearer are the longer-term trends. We have entered an era of extreme global instability which makes more frequent crises inevitable. Deglobalization and the fracturing of the advanced capitalist economies into two capitalist blocs, centered on the US and China, means that capitalism’s ability to manage economic crises is much reduced. In 2008, Barack Obama was able to coordinate a response by key powers, including China, to the biggest financial crisis since the Great Depression. China was the “engine” that then helped pull the world economy out of the ditch. All of this is inconceivable today.
The deeper contradictions at the heart of today’s economic problems go back to the crisis of overaccumulation of capital in the neoliberal era, stretching all the way back to the end of the 90s. This included massive overproduction and overcapacity. The capitalists’ answer to the problem was to stimulate demand by lowering interest rates to zero and then to negative territory and to have an era of “easy money.” This in turn has led to a series of speculative bubbles and massive, unsustainable indebtedness. As long as inflation was contained mainly in financial markets, the party could continue, despite two devastating crises in ‘08-09 and in 2020. But with the re-emergence of inflation and sharply rising interest rates, the “easy money” strategy that papered over the deeper problems is broken.
A recession, especially a deep recession, will be a disaster for working people. It will mean the return of mass unemployment, people losing their homes, and the growth of poverty. The small gains made as a result of pandemic-era measures will be completely wiped away. This will shock working people temporarily but it will also contribute to the growing loss of faith in the system. Socialists must explain that the only answer to rotting capitalism is a democratically planned global economy under the control of the working class.