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In the face of a robust labor market and rising consumer prices, the Federal Reserve is prepared to raise interest rates until it feels it has sufficiently beaten back inflation. Fed Chair Jerome Powell recently testified, “the ultimate level of interest rates is likely to be higher than previously anticipated,” and many economists now believe the Fed will not stop raising rates until the nation enters a recession.
Straight Arrow News contributor Larry Lindsey sees a recession as inevitable. However, he believes this one will look different from others, led not by massive unemployment, but by big hits to corporate profits and share prices.
Economists are often wrong, but there’s still a lot to be learned from economics. Right now, what economists and people in the stock market are talking about is the possibility of a recession. The business surveys that are coming in all suggest that perhaps the economy is already in a recession, but the employment situation is very tight. So we have to think about what kind of recession we’re actually going to have.
Joseph Schumpeter, a 20th-century economist, said that recessions are part of the process of “creative destruction.” The idea is that places where too much capital has been put will have to shrink in a recession, and that allows new industries to use that capital to grow. So “creative destruction” is an important thing to think about.
We might think back, for example, to the problems in the housing industry in the mid-2000s. Money poured into housing. In fact, it got to be costing too much — it became speculative. What the recession of 2008-2009 did was to take capital out of the housing market and redeploy it in other industries, including technology.
Well, today, it is the tech sector that probably has too much capital in it. Consider just six stocks, which are often called “FAANG+M“. They are Facebook, Amazon, Apple, Netflix, Google, and Microsoft – “FAANG M”. Now they dropped from 23% of the value of the stock market, back at the beginning of 2022, to just 18% now. That’s a pretty significant plunge.
