The danger of a recession

So the BLS has the new job numbers for March. Recovery continues at slow pace, as expected. 98k jobs created, considerably below the 200k average of the last couple of years, and unemployment rate  reduced to 4.5% with the participation rate up a little bit, but still below its previous peak, at 63% of the labor force.
The danger is that many more will suggested that we are now below the natural rate of unemployment (yes, that is a very problematic concept, something discussed here many times, too many to link). The figure above uses the data on the natural rate from the Congressional Budget Office (CBO).

The danger is that because of this view that the labor market is too tight, we end up hiking the rate of interest too much, and at the same time if Trump does not come up with his promised fiscal stimulus and spending on infrastructure we might have just monetary contraction with no significant fiscal stimulus (I'm sure he will reduce taxes for the wealthy, but I wouldn't hold my breadth for the expansionary effects of trickle-down economics). And that might be how we end up having a Trump recession. To be seen.

Comments

  1. In your view, is there reliable evidence that modest interest rate hikes could cause a recession? It seems like the experience of the 1980s showed that interest rates had to get very high before they had a significant impact.

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  2. Well, the situation now is quite different than the 1980s. Back then the contractionary monetary went hand in hand with significant fiscal expansion. And the financial deregulation and inequality had not yet led to debt-led booms. This boom is weak, and what I suggest is that in the absence of fiscal expansion, and with persistent monetary contraction of the basis of the misguided idea that we are at full employment, yes we might have a recession even with only moderately higher interest rates (say 3% or so). Of course, Trump might come up with significant fiscal expansion after all.

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  3. Private sector balance sheets are very sensitive to rate hike given the debt to income built up since 1981.

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