Flying Blind: Instruments-Only Economic Landing Coming

So, interest rates will keep going up—where’s the ceiling, who knows?—labor shortages and inflation are hanging around—employment appears to be getting stronger and Bloomberg has declared that only rich people will be able to afford new cars for the foreseeable future—and Larry Summers and Jamie Dimon agree that they have no idea what’s going to happen next.

JPMorgan boss Dimon, who last year told us there was “a hurricane” bearing down on the US economy that would either blow out to sea or become a Cat 5, appeared on CNBC yesterday to express his concern about the level of uncertainty over where the economy is headed, calling it “worse than usual.”

Then he declared that there’s “some scary stuff out in front of us,” citing a list that included “Russia, Ukraine, oil, gas, war, migration, trade, China”—and Fed Rate hikes.

Dimon reiterated his previous guidance that the Fed will pause and then resume rate hikes; he said there’s a 50% chance the Fed will boost the benchmark rate to 5% and a 50% chance it will set the ceiling at 6%.

The JPMorgan CEO also said “there’s still a chance” of a soft landing for the US economy, but he didn’t put a percentage on it.

Summers, the former US Treasury Secretary, summoned up some scary stuff from the cartoon world to underline his dour prognosis in an appearance on Bloomberg TV’s Wall Street Week.

Summers warned that later this year we may face a “potential sharp drop-off in activity” abruptly colliding with a still-robust economy, suggesting this may become a cliff-dive comparable to what the former Treasury chief called—Beep! Beep!—”a Wile E. Coyote moment”—evoking the iconic scene in every Road Runner cartoon: the moment when Wile E. runs straight off a cliff and stands suspended in mid-air for a couple of seconds.

“We’ve got an extremely difficult economy to read,” Summers said. “People may be reading a bit too much into the moment in terms of economic strength—relative to the way things could look very differently in a quarter or two.”

While current economic indicators “look very strong,” he said, in the TV interview, “there are a variety of leading indicators that are more troubling.”

The troubling indicators that Summers cited—all of which traditionally have pointed to recessions—include inventories that he said “look to be building up relative to sales,” companies that he said are “reporting concerns about their order books,” and a business sector that has a high payroll head-count relative to “the level of output they’re producing.”

Summers also noted that “consumer savings are being depleted” and there is a low savings rate.

“There is stuff when you look down the road a bit that has to be substantially concerning about the Wile E. Coyote kind of moment,” Summers said.

Scary stuff, like what Summers called “a powerful historical truth that’s relevant to our current situation,” the fact that the US has never been able to avoid a recession whenever the unemployment rate dropped below 4% and inflation went above 4%.

Here’s an even scarier thought: the most experienced back-seat pilots who are giving Jerome Powell their best advice for putting the wheels on the runway without crashing the plane—in a thick fog—may be failing to take into account that there’s better than a 50% chance that there are NO historical precedents relevant to our current situation—because it’s never happened before.

Pop quiz, Prof. Summers:

When was the last time a global pandemic turned the balance of supply and demand upside down, shattered supply chains, spawned a massive labor shortage and shortages of essential goods, ignited an inflationary spiral, rendered 60% of older office buildings “obsolete”…

…put 1.3B people in China under lockdown, pushed the e-commerce share of retail up to 60% then dropped it down to 14%, reordered the priorities of domestic manufacturing, disrupted agriculture (exacerbated by a war in Europe’s breadbasket)…

…saw hotels go belly up and then scratch for workers as tourism surged again, changed a century-old labor-management paradigm and ushered in a three-day office work week with—in Steve Roth’s words—Mondays “touch and go” and Friday “a holiday forever”…?

Let’s hope our leading economists aren’t the ones standing in mid-air blinking when the denouement of our unprecedented situation arrives. Let’s also hope that Fed Chief Powell does indeed “stay nimble and flexible,” as Summers urged him to do on Thursday.

Here’s another way of putting it—Beep! Beep!—to avoid becoming Wile E., you’ve got to be the Road Runner.