May 12—The economy has been in a confusing state as of late.
Inflation has cooled some with recent rate hikes from the Fed. But the labor market remains tight, data for April showing employers added more than 250,000 jobs. There is also, of course, the recent banking failures and a third straight quarter of GDP growth.
Despite the confusion in the economy, one word continues to linger: recession.
Some economists predict a recession can happen in the next year. Others see more of a soft landing — or, in other words, a moderate slowdown in the economy. There are others who aren't talking recession at all.
But what is a recession? How does it affect the economy at large and locally? What are experts saying about the economy as it stands? And if one does happen, what would that look like here in New Mexico?
The Journal interviewed three local experts — University of New Mexico Anderson School of Management Associate Professor Reilly White, UNM Bureau of Business and Economic Research Director Michael O'Donnell and New Mexico State University Center for Border Economic Development Director Christopher Erickson — to get their takes.
This interview has been lightly edited and condensed for clarity.
Let's start off by defining what a recession is, and why people across the country are talking about it.
White: "A recession is a negative economic development. We have different definitions, depending on who you ask. The most affirmative version of this, the one that was quoted most recently, was that it's two consecutive quarters of negative GDP growth. But it's not really that simple.
"And so what it is, at the end of the day, is a meaningful decline in economic activity that usually results in a subsequent increase in unemployment that affects workers. And so there are many ways we can interpret what that means.
"The last recession we had was in the COVID-19 pandemic, early 2020. And before that, it was the Great Recession of 2008-2009. And before that, it was the sort of tech bubble recession of 2000-2001.
"We have all this data that we collected over time, and so looking at it this way as a workable form, it is a feature that has occurred repeatedly (in our) economy over periods of time. We've had recessions that have been separated by months; we've had recessions that have been separated by a decade. But the idea being is it's a temporary economic decline."
In terms of a recession, what points of data are economists typically looking at — and measuring — to forecast if one is coming or not?
O'Donnell: "So that's a little bit of a challenge. The reason why it's a challenge is because ... the call of a recession is something that's kind of a little bit of semantics. And what I mean by that is there can be times when it feels like a recession to the population. ...
"The recession is ultimately called by the National Bureau of Economic Research, and they use a suite of data where the key piece of data is GDP, or GDP growth. But they look at other factors as well.
"Other indicators that you would look at are things like employment. However, employment is even sometimes more lagging than GDP. Other indicators that you might look at are things like equities and the stock market. But the stock market is volatile anyway. And there could be any number of reasons why the stock market goes up or down and, you know, obviously, people study it. But quite frankly, it seems to be reactive to just the most recent news that it's received. ... Unemployment and initial claims for unemployment — those kinds of things, too, which might be a reasonably good indicator of where things might be headed.
"But there isn't really one good indicator, and that's obviously at a national level. When you kind of narrow your focus down to New Mexico, it gets even more challenging because the data is even more delayed than the national data. And we don't have the benefit of some of those larger indicators that you would look at nationally, like the stock market or monetary policy. And so it's a little bit more difficult to kind of pinpoint what's going on at the state level, which is why we end up looking at things like employment, again, which is sort of delayed. But those are the kinds of pieces of data that we look at."
What would a recession look like in New Mexico? And what industries or sectors would be impacted?
White: "So we have less pain during a recession, but a longer recovery time. And there's a few reasons for that. One ... is the composition of our employment. So about 21% of our labor force is employed in some form of government, compared to about 13% in Arizona, 16% in Colorado. The government is less responsive to those ups and downs to economic changes because they're performing all these services for people and all those other things. And so we don't see mass layoffs happen with the government, you know, because the recession has happened.
"And we also don't see mass hiring happening right after it's over. And also tied into that is we have a very small number — especially compared to other states of our size — of large publicly traded companies. These companies do a lot of firing when recessions happen, and they hire back really quickly. ... And we don't have a lot of those companies. ...
"Things that result in consumer spending (will be most affected). And if we think about those sectors, everything from the 30,000 jobs we have in manufacturing to the 51,000 jobs we have in construction, things like trade, things like information, things like financial activities and business services, professional and business services ... it's likely (those) companies will start trimming budgets, looking at these questions of earnings drop."
O'Donnell: "It would depend on what exactly was setting things off. My guess is that it would just be overall general economic weakness. So I would expect that most industries would just kind of take a dip. And I don't know that there would be any one particular industry that necessarily would be sort of leading the charge, so to speak.
"Those other recessions were really driven by specific things. You know, (the) pandemic (was) service related stuff. And the Great Recession, kind of banking and financial stuff. And that was kind of what sort of set the cascade in motion.
"This time, I don't know that anybody is really saying anything specific. ... But, you know, the straw that broke the camel's back a little bit could be the banking industry, just because of some of the banking failures that have happened recently. And it doesn't seem like any of the larger banks are really at risk from what I've read. It seems like, in general, it's sort of the relatively smaller, more regional banks that might not have the robust regulation that you might expect them to have. ...
"But I don't know that it would be anything specific that would be sort of leading things. I kind of think that it's just overall softness and that would mean that things would kind of move sideways, things might dip a little bit, and that employers just aren't really hiring as much as they were, their interest in hiring isn't as high. So I would expect that it would be something like that, again, unless something sort of bubbled to the surface that it was like, 'Okay, yes, this specific thing is really gonna kind of drag things down.' And I just at the moment, don't see that."
Will a recession happen?
White: "It's too early to tell and how hard a recession is depends on not only the economic activities at play, but their response to those recessions. So what made the COVID-19 pandemic not a long-term recession was we injected a historically large amount of stimulus into the economy, and that obviously depends on certain amounts of political viability to do those things, as well as other issues that are completely unknown.
"What will Congress do is a better question as to the next recession — and Congress will respond depending on issues. If Congress perceives the recession is something that is a regular recession, it's unlikely to imagine massive stimulus spending happening again. ... And there is still enough hope that the existing recession will be a relatively minor one if it happens. In other words, you're looking at a couple of quarters of some higher unemployment, but economic activity potentially rebounding within a year's time. So that would be a good estimate of that.
"There's a lot of unknowns that can throw that out the window, and not just things like the geopolitical political situation involving Russia and Ukraine or other things that happen that are unknown. ... So I think that to support the idea of a less severe recession, you have a Fed that has demonstrated that it's learned the lessons from 2008. What I mean by that is when we had the banking failures ... to prevent (a) run on deposits they opened up this credit facility, they allowed banks to borrow to keep their depositors afloat and help stabilize the financial system. That showed that they learned significantly from 2008 because if that had gone unchecked, we likely would be in a recession right now.
"So there's all these things that are part of this question. But right now, it depends on both the nature of the economic situation as well as the response, and the hope is still it will be minor. It will be more severe if we default on the debt or we have a geopolitical crisis, and Congress remains ineffective in providing any additional support. It will be minor if the Fed remains responsive, Congress provides tangible support in some way to whatever sector is being hit, and we can manage our way out of it."
Erickson: "It's always hard to predict. The past is easy to predict, the future isn't. But the times right now are particularly uncertain because we're coming out of a pandemic. There is no pandemic in the economic record. Before this pandemic, the last pandemic was in 1917. And that was before we had modern economic record keeping. We didn't have GDP numbers, we didn't have employment numbers. We did have the CPI, but we didn't have any of the other economic variables that we so often depend on now for economic analysis. And so we really can't go back and use that as a model of data.
"As you come forward, maybe the demobilization from World War II is an example of what we're going through now, where everyone left to fight the war, and then they came back and had to be reincorporated into the economy. We had everyone that went on a shutdown, that was kind of like fighting a war against the pandemic and now we're trying to get restarted up. And so if we use those two very imperfect analogs from history, we see that what we're happening right now is kind of what happened before. We had very high inflation during the pandemic and at the end of World War II. ...
"This is a very different economy than we had back then. Still, the supply chain problems and World War I and the supply chain problems and World War II — and to some extent even could talk about the Korean War — all of those were associated with inflation with supply chain problems and with the economy acting much as it is today. ...
"My expectation is that there's a good chance we'll have a recession at the national level and at the state level, but that is far from certain. ... I just don't see a recession right around the corner. Of course, offsetting this are two things. One is that we've never in the economic record have had a run up in the interest rate like we've had over the last year-and-a-half without a recession. And then the second is the series of banking crises, which appears to be worse than people thought at first."
Fed economist: New Mexico job growth is strong despite lingering inflation
"Job growth has certainly slowed. But if you look at what it slowed down to,...
May 12, 2023 2:31PM
