Jonathan Levin: Why do you think a recession is more likely than not in the next 12 months?
William Dunkelberg: We’ve tracked small business optimism since the survey began in 1973. So we’ve seen a lot of recessions and booms and developed a number of indicators to see how the economy is doing. And one of the best indicators of the timing of a recession is to ask about business conditions six months from now. It’s a simple question, “Do you think it’ll get better, the same, or worse?” And we look at the net percentage that says better, and that’s the lowest in the 48 years I’ve conducted the survey. More specifically, every time there’s been a big slump, we’ve had a recession shortly after, and of course that’s the position we’re in. So where did I get 70%? Basically, I looked back at our numbers and said we predicted at least 70% of the recessions — maybe all of them, depending on how you want to look at the timing. If we collapse, the economy seems to collapse.
JL: What other key metrics are driving your belief that we are headed for a recession?
WD: Another question we ask relates to expected real sales – real volume so we can discount inflation – and that percentage is also a big negative number. So the companies have a very sad view of the sales they can make in the second half, even though they are now trying very hard to hire workers and make hay while the sun is out. But they don’t think that will last, so it’s looking really bad. Another question we ask is, “Is now a good time to start growing your business?” And that’s about as low as we’ve come across. Nobody wants to expand their business and it shows in the questions we ask about investment plans; They didn’t crash, but they’re pretty weak. So all of these things aren’t looking very good for where the economy is going to be on Main Street, and of course that’s a big part of the economy.
JL: You have access to a lot of great survey data. But as we’ve seen in other surveys — including consumer sentiment — this economy is in an odd place, and people’s actions don’t necessarily match their verbal assessments of how bad the economy is. How do you balance words and deeds in your economic forecasts?
WD: Small businesses really are the interface between producers and consumers. You don’t buy a car from Ford Motor Co., you buy it from a dealer who then communicates with Ford about the nature of the demand at the time. Obviously, consumers aren’t very happy, and of course that’s two-thirds of the economy. So if this gets worse, things won’t look as good. If you look at what’s happened to retail sales over the past few months, they’re getting worse, especially when you adjust them for inflation. we [small businesses] Take that and send messages back to the big manufacturers and let them know if we want more cars or fewer or anything else.
JL: Do you have any sense of how bad a recession could be?
WD: To characterize it as a “feeling” would be correct. I’d say the steeper our index’s decline over expected business conditions, the worse the recession. So if you look at the 1975 recession on the charts, we didn’t have a big downturn, although we definitely did; ’80-’82, that was bad and our indicator was really full of it. And it really went downhill before the 2008 recession, and then plummeted for a month or two in 2020 as the government shut down the economy.
JL: What do you think of the argument that the job market still looks strong and household savings and wealth are a cushion?
WD: It could. Of course, what we had were the government mail-order checks to everyone. Economics has a theory about this, and it says that if you get a large sum of money, what do you do with it? You save it unless you think it will keep coming. We didn’t think that was going to happen, we knew these were short-term gains. Sure enough, deposits built up quickly. So we have a lot of money, a trillion or two, and there’s some evidence that we used some of it, but not much. It is wealth and we save it. The other thing to note is that the use of revolving credit is back now, so people who don’t have the savings or don’t want to use them use credit — and that’s generally not a good thing, though it is only once so far record level.
A lot of us, and more people than we used to, have a lot of stock market wealth. The Fed stopped me from investing in bonds, so I have way too much in the stock market and it was a bad experience. You lose a lot of money on paper. And that’s not very helpful for optimism or spending. These things, I think, tie in pretty well with the notion that the economy is about to weaken — and maybe quite dramatically.
JL: This feels like maybe the most anticipated recession of all time. What do you think of this notion that we talk so much about recession that it becomes a self-fulfilling prophecy?
WD: Psychology is very important. For this reason, the Consumer Index was created in the 1950s by a psychologist, George Katona, who said that the way people feel influences their decisions about such things. Now we have a lot of polls like ours, the Michigan poll and the Conference Board and so on that look at expectations. So it’s possible, but I think for the most part data will determine where things are going, and it’s pretty hard to be optimistic when you’ve lost 20% of your retirement portfolio and interest rates are going up so dramatically that you’re buying the house Something you thought you could buy now can’t – you can’t or don’t want to qualify for the mortgage. So the facts on the ground will still play a big part in how people see what’s to come.
Statements can be important. Jay Powell can say what he wants about the future, but the numbers are coming out and that’s really what we’re looking at.
JL: What would make you change your perspective on the recession?
WD: It’s not something you’d like, but the Fed could say, ‘You know, we shouldn’t hike rates, we should start cutting rates again. We liked the zero limit.” That can temporarily save us from slipping into a recession. The housing market would get strong again and more people would take out loans and blah blah blah. Asset prices would rise. I don’t think that will happen at all. I think the Fed is going to stay the course and we’re going to see a traditional Fed recession coming, you know, wait too long, slam on the brakes, put your foot on the emergency brake at the same time as the brake, and we slide into a recession. And then we’ll have to see what brings us out.
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Jonathan Levin has worked as a Bloomberg journalist in Latin America and the US, covering finance, markets and M&A. Most recently, he was the company’s Miami office manager. He is a CFA charterholder.
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