Friday, October 21, 2022

Yes, recession signals are flashing bright red

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Oct 21, 2022 View in browser
 
POLITICO Nightly logo

By Ben White

With help from David Siders

A photo of empty shelves in a K-Mart.

Empty shelves in a closing K-Mart. | AP Photo/Seth Wenig

STORM FORECASTTo hear President Joe Biden and other top administration officials tell it, the U.S. economy is very unlikely to hit recession anytime soon. And if we somehow do experience such an official economic slowdown, it will be brief and gentle, like a soft summer rain.

Don't bank on it. 

Judging by almost any other economic measure, Wall Street forecast and historic precedent, the U.S. is absolutely headed to recession, probably soon. And nobody knows how long or bad it could be. There are reasons to hope it won't be super nasty — which we will deal with later — but absolutely no guarantee.

Biden last month said to CNN's Jake Tapper , "I don't think there will be a recession. If it is, it'll be a very slight recession. That is, we'll move down slightly."

Commerce Secretary Gina Raimondo this past Sunday told Bloomberg TV: "As I see it, a recession is not inevitable. Certainly any kind of a significant recession, I think, is absolutely not inevitable."

The problem is the data says otherwise. A model developed by Bloomberg that includes 13 macroeconomic and financial indicators this week upped its forecast for a U.S. recession within the next 12 months to … wait for it … 100 percent. As in: Zero chance of avoiding one.

Bloomberg's model could be wrong. This is an enormously difficult economy to figure out. Inflation remains historically elevated, the Fed is racing to boost interest rates to slow things down. But demand for labor, while slowing a bit, remains quite high and the jobless rate has not budged much from historic lows.

Still, many other signals are flashing bright red as well. The Conference Board Index of Leading Economic Indicators declined 0.4 percent in September and is down 2.8 percent over the last six months.

In a note to clients this week, Jeffrey Roach, chief economist at LPL Financial, wrote: "Since the inception of the Index, a decline of this magnitude over a six-month period always foreshadowed a recession in the coming quarters." Again … there's that 100 percent thing.

Stocks rallied a bit today on a report suggesting that while the Fed remains on track to jack interest rates up another three quarters of a point next month, the central bank is also "likely to debate then whether and how to signal plans to approve a smaller increase in December."

That offered the first little glimpse that a Fed bent on doing whatever it takes to snuff out inflation is at least open to the idea that it might have to slow down the pace of hikes. At some point. Maybe.

But the latest whispers from the Fed are a pretty thin peg to hang a lot of hopes on. Powell has repeatedly said that recession is a serious possibility and that neither he nor anyone else on earth knows how bad such a recession could be.

Thus far, all the hikes have done pretty much nothing to bring down the pace of inflation but they have jacked up mortgage rates and slowed the housing sector. Sales of existing homes plunged 23.8 percent in September from a year ago.

Hiring remains fairly strong but job openings are declining and recent corporate earnings calls are filled with talk about being more selective about adding staff or stopping hires altogether. That's generally the precursor to actual layoffs. If consumer demand begins to cool, companies will be quick to trim investments including hiring.

The consumer has held up remarkably well thus far. But that could change quickly as Americans are burning through Covid-era savings at a rapid pace to keep up with high prices. And while workers continue to see pay go up, all of the gains and more are being burned away by higher prices, making it feel like a recession right now for most. And then there is history. While the Fed tries to avoid recessions when hiking rates, it almost always fails .

All of this presents obvious political problems for Biden and his happy band of "remain calm, all is well" warriors. If and when recession does hit late this year or early next, they risk looking very wrong and very out of touch. Then, of course, the reality of recession is never good for an incumbent party seeking to hold the White House. The non-recession economy we have right now is already the Democrats' biggest liability in the midterms by a large measure.

There are some reasons Biden and Co. could be at least somewhat correct that any recession won't be cataclysmic. There's no systemic banking sector failure like 2008 or a massive bubble bursting like the dot-com crash in 2000-2001. Inflation could finally relent under the weight of Fed hikes, allowing for a faster end to all the tightening. Business and consumer balance sheets are in pretty good shape despite the savings depletion.

But recessions are tricky beasts that can feed off themselves and turn out much worse than expected. And we haven't seen this many rate hikes, this fast, well, ever. And they are happening all over the world.

Bottom line: Recession is never inevitable until it happens. But avoiding one would be quite miraculous. And the argument that it will be mild is much more a happy wish than a solid forecast.

Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com . Or contact tonight's author at bwhite@politico.com or on Twitter at @morningmoneyben .

 

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Poll Watcher

0.1 percent

The lead that Democratic Sen. Raphael Warnock has over Republican Herschel Walker in a new poll of Georgia from Landmark Communications . Warnock had 46.1 percent of support, while Walker had 46.0 percent and Libertarian Chase Oliver came in at 3.4 percent, suggesting the possibility of a runoff. The poll has a margin of error of plus/minus 4.4 percent.

What'd I Miss?

Steve Bannon holding a finger up while speaking into a bunch of microphones.

Steve Bannon, a former advisor to President Trump, speaks with reporters as he departs the E. Barrett Prettyman Federal Courthouse in Washington, D.C. after being sentenced to four months in prison for contempt of Congress. | Francis Chung/E&E News/POLITICO

— Bannon gets 4 months jail term for defying Jan. 6 committee subpoena: A federal judge has sentenced longtime Donald Trump adviser Steve Bannon to four months in jail for defying a subpoena from lawmakers investigating the Jan. 6, 2021 attack on the Capitol by a pro-Trump mob. He will also be required to pay a $6,500 fine if his convictions stand. U.S. District Court Judge Carl Nichols, a Trump appointee, said Bannon inappropriately defied the House's select committee on a matter of significant national interest, and even after roadblocks to his testimony had been removed.

— Jan. 6 committee subpoenas Trump: The Jan. 6 select committee subpoenaed Trump today , a historic — if largely symbolic — step that is unlikely to compel Trump's testimony before the panel dissolves at the end of the year. The panel's chair, Rep. Bennie Thompson, issued the subpoena eight days after the panel unanimously authorized the Mississippi Democrat to demand the former president's testimony. It's just the second time in modern U.S. history that Congress has taken such a step.

— Biden rules out eliminating the debt ceiling: Biden today vowed that he "will not yield" to GOP demands that he cut entitlement programs like Medicare and Social Security in exchange for avoiding a standoff over the debt ceiling. But he also ruled out taking one of the more extreme measures to avoid such a fight, saying he opposes eliminating the debt limit altogether as a means of averting future confrontations. Such a move, he said, would be "irresponsible."

— U.S., Russian defense chiefs speak by phone for first time since May: The U.S. and Russian defense chiefs spoke by telephone today for the first time since May , according to a Pentagon spokesperson. Defense Secretary Lloyd Austin and Russian Defense Minister Sergei Shoigu discussed "international security problems, notably the situation in Ukraine," according to a readout posted by the Russian Ministry of Defense on Telegram this morning. During the call, Austin "emphasized the importance of maintaining lines of communication amid the ongoing war against Ukraine," said Pentagon spokesperson Brig. Gen. Pat Ryder.

— Soaring tax revenue, spending plunge spark record drop in budget deficit: The U.S. government posted a record decline in federal deficits in fiscal 2022 , as surging tax revenue and waning pandemic spending helped cut the budget gap in half. The annual budget shortfall totaled $1.37 trillion, compared to $2.77 trillion in the previous fiscal year, the Treasury Department said today. That's due in part to record high tax receipts, which jumped last year thanks to a strong economy that drew more people into the labor market, pushing up the amount the government collected in individual and corporate taxes. Federal spending also declined, as fewer people collected jobless benefits and other pandemic-related programs wound down.

 

LISTEN TO POLITICO'S ENERGY PODCAST: Check out our daily five-minute brief on the latest energy and environmental politics and policy news. Don't miss out on the must-know stories, candid insights, and analysis from POLITICO's energy team. Listen today .

 
 
AROUND THE WORLD

An explainer video about Liz Truss' short premiership.

BLOWING UP BRITAIN It was a revolution 11 long years in the making , writes Emilio Casalicchio and Jack Blanchard .

For a small but vocal band of right-wing libertarians, Liz Truss' appointment as U.K. prime minister on September 6 seemed the triumphant end point of an epic and improbable march that led them from the fringes of British politics to its grandest corridors of power.

In the course of just over a decade, a group of little-known politicians, fringe think tanks and outspoken media figures had helped drag the Tory Party, and the nation it led, from David Cameron's vision of so-called compassionate Conservatism to a Brexit-backing, free-market embracing, low-tax juggernaut.

It took them four Tory prime ministers, four general elections and an era-defining referendum to do it — but with Truss in charge, they were finally living their dream. The country was to be remade in their image.

It lasted 44 chaotic days, and no more.

"They felt their moment had come at last," said Tim Bale, professor of politics at Queen Mary University London. "This would prove that Brexit hadn't been a ghastly mistake, but a fantastic opportunity. But of course, as it was always based on fantasy, it was always bound to collide with reality."

Nightly Number

More than $30 million

The amount of money that Republican groups have spent on the Ohio Senate race . Though the Republican candidate, JD Vance, leads Democrat Tim Ryan in the polls, the fact that the race is close in a state Trump won by eight points in 2020 means Republicans are forced to allocate resources to defending the Ohio seat, rather than toward picking up Democratic-held seats elsewhere in the country.

Radar Sweep

OUT OF THIS WORLD — Does alien intelligence exist? We still don't have a definitive answer, but a group of scientists are working on gaming out what the first interaction between humans and intelligent aliens might look like . Read about it from Becky Ferreira in Motherboard.

Parting Words

A photo of Sarah Palin.

Republican House candidate Sarah Palin campaigns in Alaska. | AP Photo/Mark Thiessen

DISPATCH FROM THE CAMPAIGN TRAILEver since Rep. Mary Peltola, a Democrat, won a special election for a vacant congressional seat in Alaska, it's been obvious to everyone — in Alaska, and in the Lower 48, too — that ranked choice voting is a real problem for hard-line GOP candidates, David Siders emailed Nightly.

Just ask Sarah Palin. The former Republican governor and 2008 vice presidential nominee lost to Peltola in that August contest, which was Alaska's first statewide ranked choice voting election.

"Ugghhhh," she told me when I asked her about the system after a debate in Kodiak earlier this month. "It's not good."

But for the state's moderate Republican Sen. Lisa Murkowski, ranked choice voting may be what ends up keeping her in the Senate. Partly that would be because Democrats in heavily conservative Alaska seem to have a pretty good idea of what to do in November.

On the morning of the debate in Kodiak — where the hotel leaves "Know Your Tsunami Hazard" flyers in the lobby and warns of bears in the parking lot — inclement weather got in the way of a canvassing event for Peltola. But one supporter, a commercial fisherman, showed up. Sitting in his Honda Ridgeline as a steady rain fell outside, Peter Danelski said he'd cut a $250 check to Peltola the previous night. Later that day, he was planning to attend a meet-and-greet with Murkowski just down the road.

Danelski is a Democrat who describes himself as "left of Bernie Sanders." But he planned to vote for Murkowski. He likes her, and he knows the math.

"She's an independent-thinking person," he said. "And trying to get a Democrat elected [in the Senate race] is next to impossible."

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