Honestly, I’m uncertain about my beliefs in light of this peculiar pandemic-driven cycle. The usual historical analogies don’t seem as applicable. The economy has shown remarkable resilience despite interest rate hikes, but whether this trend will continue remains unknown.
Let me put it this way: If we assume that tightening by the Federal Reserve will lead to a recession, we would expect this to primarily impact the housing market, as it traditionally does. Admittedly, the Fed’s rate hikes did result in a significant increase in mortgage interest rates, reaching a peak of 7 percent nearly a year ago, with subsequent fluctuations. Surprisingly, housing starts have remained fairly strong, even surpassing pre-pandemic levels, after an initial dip. Hence, the typical process through which rate hikes cause a recession doesn’t seem to be taking effect. While other factors may contribute to a recession, historical correlations may not provide much guidance.
Coy: Paul, you were right to criticize those who believed that a severe recession was necessary to combat inflation. I also agree that the current state of the economy is unconventional. Surprisingly, the labor market has remained relatively strong, which is quite encouraging. The housing market is also quite stable.
However, there are signs of cracks forming. Numerous indicators suggest that a recession may be imminent. Starting with housing, as you mentioned, the higher mortgage rates are negatively impacting the sales of existing homes. People are reluctant to move because they would have to replace their affordable mortgages with more expensive ones. Consequently, the market is stagnant, with limited houses available for sale, and potential buyers struggling to find suitable options. In addition, very few people can currently refinance and obtain better rates, which eliminates a potential source of cash for consumers. According to the Mortgage Bankers Association, although mortgage applications, including refinancing, increased in the previous week, the overall index is still where it was back in 1997. I can hardly recall the events of 1997.
Furthermore, the labor market’s resilience is not as robust as it initially appears. Many of the newly created jobs are part-time positions. In the 12 months leading up to August, average weekly hours worked in the private sector slightly decreased. When considering aggregate hours worked by all individuals, there was only a marginal 1.8 percent increase over that period. If the Fed is banking on the labor market breaking down before easing its policies, it may end up waiting too long, as by then, the damage will already be done.
Denial of responsibility! Vigour Times is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
