Doug Kass: Is the Economy Now Recession Proof?
Let's see why we could have a 'recession proof' economy and what the real problem really is.
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Is the economy now recession proof, and if so, what does that mean for Fed policy, and the neutral rate?
Also, is the recession question really a syntax question as opposed to a practical one? And does this matter to the Fed?
Syntax Analysis
By a syntax question, this is what I mean: A recession is measured by reported gross domestic product and reported employment. GDP is in part a function of reported inflation. If inflation is understated, GDP is overstated, by the same amount. Employment includes jobs going to immigrants, second jobs, jobs created by the birth/death model, and jobs going to government employees that often have negative productivity and whose roles (regulatory and bureaucratic nonsense) end up harming the country and the economy, even though they help GDP over the short term.
GDP also includes government spending, which goes beyond just government jobs. Wasteful government spending also increases GDP over the short term. Sadly, despite all the noise, it is unclear to me if there is an actual governor on government spend. As best as I can tell, not much has changed in that regard, either. Entitlements remain untouched, and the rest of it, who knows? But it feels like the overall budget might be getting worse, which is part of what the price action in gold has been telling you.
Recession or Not?
It seems the whole country thought we were in recession in the middle part of the Biden administration; this includes very prominent financial minds and the average Joe. There is a reason the election went the way it did ... “It’s the economy, stupid.” But apparently, as measured by the official stats, not only was there no recession, things were pretty good. Now, we are still not in recession, and as measured by the same stats, it still seems 50% likely we will not be in recession, and if we ever enter one, it feels like it might be mild, at least as measured by those same statistics.
So is the economy now recession proof? If we don’t go into a recession now, with the shaky foundation that was in place, including an overspent consumer, all the debt, global tensions and all the uncertainty, it feels like we will never have a recession.
It seems there are two issues. There are the measurement issues that I discussed, and structural issues. I think the biggest structural issue might be we no longer are a manufacturing-based economy, for better or for worse. Therefore, it is harder for the economy to move into a substantial overcapacity position, leading to a recession.
If the economy is now give or take recession proof, as measured, what does this mean for rates over time and what the “neutral” rate really should be?
Probably a fair bit higher than it was the last 20-30 years. In fact, over the last 20-30 years, you could argue the only problems the economy has had, have come from interest rates being kept too low for too long. The only crises our economy has had are financial ones, not normal economic recessions driven by corporate over-investment. As the 2000 tech bubble burst, rates were kept too low, too long going into it. At the 2008 financial crises, rates were kept too low for too long going into it. Silicon Valley Bank? Rates kept too low for too long. The recent inflation problem -- same thing. Rates kept too low for too long and much to much money printing.
Bottom Line
If we do not go into recession now, or it is just a mild blip, we have a recession-proof economy. Rates do not need to be near zero in a recession-proof economy, ever! It does more harm than good, and the proof is in the pudding. The neutral rate is now higher.
This commentary was orginally posted in Doug's Daily Diary on TheStreet Pro.
At the time of publication, Kass had no positions in any securities mentioned.
