- Private Wealth Solutions
The Economic Outlook | Summer 2022
The grieving process consists of 5 stages: denial, anger, bargaining, depression, and acceptance. * One will likely recall, during 2021, Fed chairman Jerome Powell referred to inflationary pain as transitory. It was then that he, along with much of the populace, entered the first step of the grieving process, denial. It is becoming more apparent that inflation was not merely transitory. Stephen Stanley, chief economist at Amherst Pierpont, referred to consumer sentiment towards inflation as, “more grumpy than fearful.” ^ This is evidence that Americans are now in step two of the grieving process, anger. He goes on to say that consumer spending will likely only be affected when, “households are more worried about holding their jobs.” If consumer grumpiness turns into consumer fear, that would lead to the third stage of grief, bargaining.
Bargaining, or the fear stage, is what the Fed is hoping to avoid. The hope is that America’s current economic issues can be mitigated by monetary policy such that fear never sets in. If the bargaining phase prevails, and fear sets in, the country is likely to see one of two results: recession or longer-term inflation. Reactions to economic fears often exacerbate, instead of avoid, the very thing that is feared. If a population becomes fearful of long-term inflation, they are more likely to buy today instead of in the future, which would lead to stronger inflation. If they fear a recession, they are more likely to stockpile their cash and stop consuming, which would drive recession deeper. There could potentially be neither (the much hoped for “soft-landing”), longer term inflation, or recession, but probably not both.
Should inflation persist, Americans can expect to see more of the same: continued rising prices and interest rate hikes in response. It is worth noting that this inflationary pressure is not just a domestic problem. Rising prices and interest rates will more acutely impact developing countries. Global debt has soared over the past two years, hitting a new record in 2021 of $303 trillion. 60% of developing countries are in the danger zone for default. ^^ Russia just defaulted on their debt for the first time in decades. Countries like Sri Lanka, Egypt, Tunisia, Peru, Pakistan, Ethiopia, and Ghana are also in vulnerable economic situations.
If a recession is unavoidable, analysts at Goldman Sachs and Wells Fargo agree, it will likely be only a technical or mild recession. ** They site “consumer strength and a robust jobs market” as their main argument. Technical recessions show a decline in GDP over two quarters, but without the pain typically associated with a recession. President Reagan once said, “A recession is when your neighbor loses his job. A depression is when you lose yours.” A recession in 2022 or early 2023, might look like neither you nor your neighbor losing a job.
To solve these economic problems, the U.S. will need to go through all 5 stages of grief, including and probably most importantly, the final stage, acceptance. The key question remains, and will likely be answered quite soon, acceptance of what: a soft landing, longer-term inflation, or a recession.