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A Recession Is the Best-Case Scenario

A Recession Is the Best-Case Scenario

The idea of a “recession” is much newer than you might think.

Policymakers first adopted the term after the Great Depression in the 1930s. They thought a “recession” simply sounded less threatening than a depression. That’s what they called any prolonged downturn before then.

But they failed to properly define the term. So when the next prolonged downturn hit in the 1970s, economists and Americans disagreed on what to call it.

Polls showed 65% of Americans thought the economy was in a recession. But in a column for The New York Times, Census Bureau’s chief economist Julius Shiskin disagreed.

He argued that “no one is saying what [a recession] is,” and took it upon himself to clear the air.

His proposal stands as the de facto definition of a recession today. That “two consecutive quarters” measuring stick you see in the headlines was his doing.

Now, Shiskin wasn’t denying the poor state of the economy in the ‘70s. He just felt that “recession” didn’t fully cover it…

Instead, he proposed a then-new term that fit the crisis even better.

And unfortunately, I believe it’s also the most likely scenario between now and 2024.

It’s a word most Americans have only had to painfully remember for the last 50 years. But if things continue as they are, it could well be at the top of Google Trends in the coming months.

Read on to see why these harsh new times could be just beginning…

Slow Growth + High Inflation Equals…

Both Shiskin and Americans turned out to be right.

The economy was in recession. It officially began in November 1973 and ended in March 1975.

But, as Shiskin argued, “recession” didn’t fully cover the severity of the crisis. He liked the term stagflation instead, which combined slow growth with high inflation.

He was right there, too. In the ‘70s, unemployment was already at 7.2% and on its way to 9%. Inflation was over 12%.

Regardless, people were suffering as economists discussed these technicalities. Sound familiar?

Policymakers today argue we aren’t in a recession. They point to low unemployment, and near-all-time highs for industrial production. They also expect revisions to show GDP wasn’t really that bad in the first half of the year.

But many Americans aren’t convinced. A recent survey shows 41% of consumers believe we’re in a recession. They’re feeling the pain of decades-high inflation and falling wages.

It feels like a recession. That’s what really matters.

But I believe a recession is actually the best we could hope for right now. Because I think we’re most likely to see ‘70s-style stagflation return to plague the next couple years.

The Case for Stagflation in the 2020s

Inflation isn’t going away.

It’s almost certain to be above 5% at the end of this year. It could fall to 3% next year. But prices will still rise.

This will hurt consumers and small businesses. Small businesses lack access to cash in the credit markets, which help in tough times. Many will fail over the next year, swelling the ranks of the unemployed.

Businesses and consumers will also suffer higher interest rates. The Federal Reserve will need to get short-term rates above the rate of inflation. This will make loans, when available, more expensive. Higher rates keep businesses from spending and creating jobs… and consumers will also refrain from spending or borrowing for big purchases.

This all points to high inflation and a stagnant economy — in other words, stagflation.

Policymakers won’t be able to respond to the crisis, thankfully. If they could, politicians would throw money at the problem, which would lead to even higher inflation.

But next year, a divided government won’t be able to pass major legislation. Instead, the parties will blame each other as the situation gets worse and worse. And they’ll be happy to do so — it gives them plenty of material for 2024 campaign ads.

This all, naturally, will affect the stock market.

The 1970s stagflation weighed heavy on the stock market’s shoulders. The Dow fell by more than half from 1972 to 1980.

Don’t bet on another v-shaped recovery for the economy over the next few years. We all need to get comfortable with the idea that what comes next won’t be as simple as the post-2008 bull market.

Regards,Michael Carr signatureMichael Carr, CMT, CFTeEditor, True Options Masters

P.S. The ‘70s stagflation was devastating for buy-and-holders. But for traders, it was a great opportunity…

Stocks swung wildly back and forth all the way down, just like what we’re seeing today.

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