Welcome to the guessing game about the Great American Recession

Welcome to the guessing game about the Great American Recession.

First, to this partisan divide among Democrats on Sunday’s talk shows: Treasury Secretary Janet Yellen said Sunday that the economy is slowing, but “this is not an economy in a recession.”

She described the job market as “very strong”. The national unemployment rate is 3.6%, and more than a dozen states have unemployment rates below 3%.

“We will probably see a slowdown in job creation, but I don’t think that’s a recession,” Yellen added. “A recession is widespread weakness in the economy and we’re not seeing that right now.”

It was on NBC’s Meet the Press. On CNN’s Fareed Zakaria GPS, former Treasury Secretary Larry Summers was even more somber.

“I think there is a high possibility of a recession when we were in this situation before,” Summers told Zakaria on Sunday. “Stagnation always happens when inflation is high and unemployment is low.”

“The smooth landings are a kind of victory of hope over experience,” Summers added. “I think it’s unlikely we’ll see one (soft landing).”

The big debate

The public disagreement among top Democrats over the economy reflects the debate in economics in general.

Economists at Goldman Sachs found on Sunday that “the probability of a recession over the next two years is nearly 50%.”

But at Capital Economics, there is a different call: “We believe the economy is well-positioned to deal with high interest rates and expect a period of weak economic growth rather than outright stagnation,” economists told clients earlier this month.

The truth is, no one really knows if the economy is really in a recession or if it’s on its way to a recession. Generally characterized by two consecutive quarters of negative GDP growth and rising unemployment, a recession is formally defined after the fact by a panel of economists at the National Bureau of Economic Research. There is no “stagnation light” going out in the White House and Wall Street.

Speculations about the recession have reached fever pitch, with the White House last week issuing a fact sheet about what it takes to determine it.
Biden faces his moment of truth about the economy this week

It’s not the politicians or the investment bankers who hold the key here. It is Fed policy makers who are trying to cool 40-year high inflation by raising interest rates. A three-quarter point rate hike is expected this week, along with critical readings for Q2 GDP, consumer confidence, and consumer price readings. (More fodder for the slack guessing game.)

Doug Flynn, certified financial planner with Flynn Zito Asset Management, told me Monday morning: “You can look at the last six times the Federal Reserve has built an increasing interest rate environment… since 1980.” “Four of those have gone into recession.”

In the end, Flynn says of Summers and Yellen, “One of them would be right.” The decisive factor will be the Federal Reserve.

“It’s a delicate balance and it’s hard for the Fed to handle the right mix of raising (rates) enough without causing a recession.”

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