US has dipped into recession as worried consumers flash warning signs: economists
The US economy is careening into another recession, two noted economists warn, as worries about the labor market and the coronavirus have worsened dramatically over the past two months.
The alarm bells are ringing as bad news piles up at the economy’s door: Prices on everyday goods are rising sharply as inflation is stuck at 30-year highs. Supply chains snarled during the pandemic mean some store shelves are bare. A labor shortage in some industries has left jobs undone. And the ultra-contagious Delta variant has put a damper on the rush back to the office.
“We are entering a recession — we are on the precipice of a recession,” one of the study’s authors, David Blanchflower, told The Post. “It’s always good to have an early warning.”
Even as vaccination rates rise and COVID deaths fall across most of the US, sentiment among consumers and workers has soured considerably as the year draws to a close, the economists say — contrasting sharply with the happy talk coming out of the White House that things are getting better.
Sentiment has deteriorated so rapidly, in fact, that two widely respected indicators of consumer feelings now are flashing red — indicating the US economy has already dipped into negative territory, the economists warn. The same indicators were flashing red ahead of the 2008 global financial crisis.
Blanchflower, a professor of economics at Dartmouth College and a former member of the rate-setting committee of the Bank of England, and Alex Bryson of University College London point to declining consumer confidence as a bellwether for recession.
Blanchflower said he called the 2008 recession “ahead of everyone else” and told The Post he believes he’s right this time, too. His recent paper with Bryson studied consumer sentiment from 1978 until now: It found that consumer expectations provide an “early-warning” system for trouble ahead.
It’s yet another caution signal for an economy that is painting a darkening picture, with a labor market that’s struggling to recover and rising inflation that is threatening to spiral out of control.
Blanchflower told The Post that even though retail sales figures have logged better-than-expected readings lately, they could soon worsen, too. He said the decline would be driven by women who are afraid to go back to work because of child care and other issues. Already, he said, there’s been a noticeable slowdown in spending on certain items like dresses and shoes — another indicator of bigger trouble ahead, he said.
The recent double-digit slump in two consumer sentiment indexes — from the Conference Board and from the University of Michigan — provides the backbone of the economists’ study. Those surveys look at what Americans say about their income expectations, employment conditions and what they think about the economy in general.
The Conference Board’s September read on consumer expectations, for instance, had dropped 25.3 points from March’s figures — the high point for the year. Meanwhile, the University of Michigan’s consumer sentiment index for September was down 18.4 points from the high it reached for the year in June.
Just ahead of the 2008 global financial crash, these indexes were ringing similar alarm bells: a 19-point drop and a 21-point dip from their highs of the year ahead of the 2008 global financial crash.
“All the recessions since the 1980s have been predicted by at least 10 and sometimes many more point drops in these indices,” the economists say in their paper.
The darkening economic picture corresponds with an apparently darkening mood in the country: A survey by The Conference Board, released Aug. 31, said 42% of workers were worried about returning to the workplace for fear of contracting COVID-19 — a substantial increase from June 2021, when only 24% expressed this concern, according to the paper.
The researchers also point to another survey showing that 40 percent of employees said they would look for another job if forced to return to the office full-time, according to the State of Work in America Survey released in September by Grant Thornton.
“This increased level of anxiety among workers is potentially justified because workers were substantially more likely to contract COVID than non-workers, despite having a higher probability of being vaccinated,” according to the paper.
What’s more, the researchers argue that these consumer sentiment reads are more predictive of a downturn than GDP growth figures — which are snapshots of the past and aren’t great at predicting the future — and by declining unemployment numbers, which they say are skewed by government programs that were aimed at helping consumers who lost their jobs or whose income declined as a result of the pandemic.
“Consumer expectations about future economic trends are highly predictive of economic downturns 6-18 months ahead, thus providing an early-warning-system for the economy,” Bryson and Branchflower write.
Still, official reads on gross domestic product growth are overwhelmingly positive: Government figures show the economy in the second quarter grew 6.7 percent when compared to the previous quarter. The economy was last in recession — which is defined as two quarters of declines in GDP — in the first and second quarters of 2020.
And not everyone agrees with the economists’ analysis, as the researchers themselves point out, describing their research as “not consistent with consensus.”
“This is a bold call,” the researchers admit. “Only time will tell if we are right.”
Mark Zandi, chief economist at Moody’s Analytics, says consumer sentiment is “just one indicator.”
“People have not stopped spending [as evidenced] by September’s strong retail sales.”
“I’d say the chance that we are in recession is less than 1 percent right now — assuming that the pandemic continues to wind down,” Zandi said.
Moody’s “Back to Normal” index, which compiles a list of government data and other private-sector figures, paints a strikingly different picture from the sky-is-falling tone of the other study: It says the US economy is operating at 94.5 percent of its pre-pandemic normal — up strongly from the 90 percent read just last month.
The National Bureau of Economic Research, meanwhile, which officially declares when US recessions begin and end, said in July that the COVID-19 recession was the deepest and shortest downturn in US history. The contraction lasted just two months from February 2020 to April, the organization said in a statement.
Still, the organization trod a careful line: It isn’t declaring the economy is back to normal.
