The Possible Recession Is a Dueling Narratives Story

Where is the economy going/? The Federal Reserve in its September 2023 meeting seemed to shrug its shoulders. Interest rate hikes are on hold for now, but the body said the “extent of these effects remains uncertain.”

Things are better, but maybe not as well as many would like. That shouldn’t be a surprise because it reflects the developing dual narrative threads based on the complications and contradictions in the economy and society.

Start with the good news crowd. The other day, Secretary Treasury Janet Yellen told Reuters that a so-called soft landing — basically a recovery without a recession — was still possible in the context of a United Auto Workers strike against the three major car and light truck manufacturers. The shocks of entire plant shutdowns will ripple through other companies and the extended influence on all those people not working. Or deliveries that don’t happen. Or consumers that can’t find goods and don’t buy them as a result.

“‘What I’m seeing in the economy is a cooling in the labor market that’s taking place in a healthy way, that does not involve mass layoffs,’ Yellen said during a discussion with Reuters editors, reporters and columnists on Monday. ‘It’s some of the heat coming out of the job market.’”

But some of the heat isn’t the same as all, or at least as much as any.

There are too many balls in the air to assume that any juggler could snatch each at the exact second and send it onward in the precise arc needed so it can travel up and back down again.

Take the possibility of a government shutdown because there is too much conflict even within pollical parties. Libby Cantrill, head of public policy at PIMCO — which manages $1.79 trillion in bond assets — told Reuters, “If the government shuts down, there may not be a catalyst for it to reopen given the complicated internal dynamics of House Republicans.”

Cantrill says the result could leave the Fed again reluctant to raise interest rates in November, but there would also be significant impacts on the economy. Goldman Sachs has estimated that each week of shutdown would reduce U.S. economic growth by 0.2%. 

The implications aren’t as negative as what would happen if the debt ceiling had not been extended. But that’s like saying the avoidance of a nuclear conflict would be worse than a major geopolitical war. The economy can still take a beating. It would crash into the UAW strike, oil prices on a march back to $100 a barrel, the restart of student loan payments that had been on furlough for years, and falling confidence of consumers in the face of falling personal financial resources.

To complicate matters, a government shutdown means no economic data to see what is happening, leaving central bankers, economists everywhere, businesses, and governments blinded.