DANIEL VAUGHAN: The whisper of recession gets louder at the White House

We’ve hit the part of the business cycle that every President wants to avoid. Business outlets are debating whether we’re about to deal with the dreaded “R” word: recession. Presidents that get elected into a recession can claim that they fixed things. But if you’re a President with a recession occurring on your watch, all the blame for it lands on your desk.

The Federal Reserve is trying to kill inflation by raising interest rates. The basic theory is that raising interest rates will dampen the demand side of the economy. People won’t be able to finance houses, use credit, and do other things as quickly during prosperous times. Theoretically, this slows the economy, allowing the supply chain to catch up, cooling price inflation pressures.

I say theoretically because the Federal Reserve has never raised rates in the environment they’re dealing with right now. The world is emerging from a global pandemic, supply chains are messed up, China is still executing a bizarre zero-COVID strategy, and people need basic things like groceries, gas, and more — all of which have seen absurd price increases.

Investors are scared.

The analogy investors are using is a hard versus soft landing. A soft landing means the Federal Reserve raises interest rates, and although there’s pain, we avoid a recession. A hard landing is the opposite: inflation ends, but we enter a recession.

The problem for the White House and the Federal Reserve is that the pain has already started. We’re only two interest rate hikes into their plan to tackle inflation, and people are terrified.

The Wall Street Journal published an article headlined: “The Market Is Melting Down and People Are Feeling It. ‘My Stomach Is Churning All Day.’” They interview multiple wealth managers and individual investors, and the fear is palpable.

Journalists for the Wall Street Journal noted, “Stocks, bonds and other assets are getting hammered this year as investors wrestle anew with the possibility that the U.S. is headed toward recession. On Friday, the Dow Jones Industrial Average recorded its eighth straight week of declines, its longest such streak since 1932.”

There are people in the piece who are already comparing their portfolios to the 2007-2008 Great Recession. The losses mounting up in the markets have comparisons to the 1930s. None of this means that we’re in a recession now, but it does say that pain is what everyone is feeling.

Small businesses feel the pain.

It’s not just investors, though. Small businesses are feeling the pain too.

The Journal surveyed small businesses who responded by saying, “inflation, supply-chain snarls, a shortage of workers and rising interest rates darken the outlook for entrepreneurs.”

Fifty-seven percent of small-business owners expect economic conditions in the U.S. to worsen in the next year, up from 42% in April and equal to the all-time low recorded in April 2020 … The measure is one part of a broader confidence index that in May posted its largest year-over-year drop since the Covid-related shutdowns of April and May 2020. Despite rising prices, the portion of small businesses that expects revenue to increase in the coming year fell to 61%, down from 79% in May 2020.

Investors feel pain, and small businesses are tightening their belts and outlooks. While that doesn’t mean a recession is right around the corner, it does tell you everything about the sentiment of the moment. And why President Biden’s approval ratings are in the basement.

Economists see a recession.

In a separate survey, “Economists surveyed by The Wall Street Journal in April on average put the probability of the economy being in recession sometime in the next 12 months at a still-moderate 28%, but up from 18% in January and just 13% a year earlier.”

Bank of America’s economists have placed recession at one-in-three odds, with stagflation looming larger for them. JP Morgan says the markets are pricing in the odds of a recession at nearly 70% in the next year or two.

Perhaps most ominously, Michael Burry, the investor who called the 2008 Great Financial Crisis, sees a deep recession ahead. He’s positioning his investments to ride out that probability. His call isn’t just for a bear market to persist but for the S&P 500 to lose slightly more than half of its value.

Fear and jitters are increasing in the markets and across the country. The President and White House can tout the economy’s strength, but Americans are wisely shifting their outlooks accordingly. And the word people are using, maybe with just a whisper at the moment, is “recession.”

Recessions are a severe issue, and Americans will demand the government do everything to lessen the pain. But until inflation is taken care of, it’s unclear what the government can do to reduce the pain. Between recession and inflation, the Biden White House is dealing with double kryptonite for any politician.

They won’t be able to spin their way out of that reality. These moments demand leadership and answers, not optics and press conferences.