For example, consumer confidence ticked up the other day, driven by better expectations for the future. Not only do people feel pretty good today, they’re also starting to feel better about what’s ahead. There are now stories coming out about how, in the Midwest in particular for some reason, people simply don’t care about the negative headlines and are out there working, spending, and having fun. As long as the jobs are there, according to the headlines, people are getting on with their lives.
This leaves our community here with a bit of a split. I had been in the “no recession” camp for a while, driven by the strong labor market (just as those Midwest headlines are calling out). With the banking situation (I won’t call it a crisis), however, I have moved over to the recession camp, as banks will be cutting back on lending and making it harder to borrow. So, in that sense, I am more concerned. At the same time, many folks seem to be less concerned overall. I am getting fewer calls for collapse, although I am still getting worries about a pending recession. What’s going on?
The right answer, as usual, is somewhere in the middle. As banks pull back to rebuild their capital base, we will see slower growth. On balance, this is a good thing. Tighter financial conditions from the banks make it less necessary for the Fed to keep raising rates. The economic effect of those tighter conditions will also be offset by the strong labor market, although not completely. In other words, while we likely will get a recession, it will be a mild one—and one that doesn’t really hit the average person.
This result is, in many respects, the soft landing we have all been hoping for. Slower growth, driven by tighter financial conditions: check, as this is what the Fed has been aiming for. Continued strength in the job market, with everyone working and able to pay their bills: check. Lower inflation, driven by that slower growth: check. It’s not bad when looked at that way.
This scenario is also consistent with the less apocalyptic headlines and with the data. When headlines express worry about the banking system, they are saying banks are weak and will pull back: check. Weak banks mean slower growth: check. But with job growth still strong and consumer confidence up, the average person is still doing well.
You will notice that the piece that makes all this work is job growth, and that is what I will continue to watch. We can have a financial recession, driven by the banking system, that the average person will ride out comfortably, if job growth holds. Right now, that is the case. When the job growth dog barks? Then we will need to pay attention. But that dog is still sound asleep.