New York Magazine recently published an interview with Jon Turek, the founder of JST Advisers. Unlike most economic experts, Mr Turek is betting against the likelihood of a recession. Most investment firms and financial analysts are looking at one main indicator: the bond markets, which are predicting a recession by the tail end of 2023. But Mr Turek does not agree with the consensus. Instead, Mr Turek predicts that a “soft landing” – where the US gets its inflation rate to a stable 2% without an economic downturn – is still a possibility.
That said, Mr Turek still believes there is a 35% chance of an American recession in 2023, but overall, the economy will be okay throughout the year. He cites three major forces driving demand over the last three years. First, excess household savings. Second, unemployment fell to a 50-year low while producing nominal wage growth, with wages at their highest nominal levels in 3-4 decades. Third, the lessening of inflation. Rents, gas, and car prices are disinflating, meaning real incomes are increasing.
Tailwinds
Decreased housing, transport, and energy costs will create a “tailwind” for consumption. Moreover, if there are fewer supply chain issues as companies finally adjust to a newly re-opened China, then companies will not be forced to raise prices as they have. These forces, however, seem somewhat temporary. And for now, the Fed’s interest rate increases are not going away, especially if there is still significant consumption-based inflation. Therefore, even if 2023 will not see an American recession, the Fed may be delaying the inevitable until 2024 or 2025. Mr Turek questions how long the American economy can handle interest rates at 4 or 5%.
When asked whether it would still be possible for the US to stabilise prices without a recession – that is, to defy history – Mr Turek thinks there is. He points to the Fed’s focus, which is not on volatile food and energy prices – but rather on drivers like wage growth. The Fed’s chair, Jay Powell, has laid out a plan to reduce wage growth without a strong rise in unemployment. This has never been done, but there is hope that it can work this time because the dissonance between labour supply and labour demand is also historic. There is currently an abnormally high ratio of job openings to unemployed workers. The Fed believes that it can cool demand enough to bring that job:worker ratio back to normal levels, then that will by itself cool wage growth down to 4% without increasing the unemployment rate.
In other words, the historic number of job openings serves as a kind of cushion against mass layoffs since, in the event of falling demand, companies can start by slowing hiring and eliminating unfilled positions rather than laying off existing workers. And then, if there are fewer job opportunities available to workers, workers will moderate their wage demands.
Mr Turek’s predictions have few historical precedents. But very few parts of life post-2020 have gone the way history would have predicted, so maybe Mr Turek will be right, and the United States can avoid entering into a recession this year.