Why a global recession is inevitable in 2023

https://www.atlantafed.org/chcs/wage-growth-tracker [ click the "wage level" button ]

And there has been a historically low number of job seekers per job opening:

https://www.bls.gov/charts/job-openings-and-labor-turnover/u...

And the US unemployment rate has been running at historically low levels of 3.5-3.7%:

https://fred.stlouisfed.org/series/UNRATE/

I guarantee you that the top graph there of how wage growth is running is what is most concerning the Fed when they talk about inflation.

We had commodities inflation during the last oil spike around 2010-2014 and the Fed didn't care about that. They know that commodities inflation acts as a tax and a natural brake on the economy and is cyclical in nature, so they didn't act. It didn't show up in wage growth.

We have both acting together right now, but it is the wage growth portion that the Fed is reacting to.

And here's a good short reaction article to Jerome Powell's comments earlier this month:

https://nymag.com/intelligencer/2022/12/jerome-powell-needs-...

Particularly focus on:

> “We’ve made less progress than expected on inflation,” Powell said.

compared to:

> The Labor Department’s consumer price index shows that, on average, prices have risen just 0.2 percent during the last five months — a stark turnaround from the high of 1.3 percent in June

The Fed is not as trivially stupid as the portrayal of the person who can't get past the y-o-y inflation headlines. They understand that CPI inflation is down. Oil and gas prices are back down. Why are they still yapping about less progress than expected keeping inflation under control? They're not pants-on-head stupid. Their definition of inflation encompasses wage growth (and I'd argue that in fact that is the definition of inflation that they are MOST concerned about) and isn't any of the CPI numbers.

And you can read this concern directly from Powell's remarks:

> Despite the slowdown in growth, the labor market remains extremely tight, with the unemployment rate near a 50-year low, job vacancies still very high, and wage growth elevated. Job gains have been robust, with employment rising by an average of 272,000 jobs per month over the last three months. Although job vacancies have moved below their highs and the pace of job gains has slowed from earlier in the year, the labor market continues to be out of balance, with demand substantially exceeding the supply of available workers. The labor force participation rate is little changed since the beginning of the year > [...] > The third piece, which is something like 55 percent of the index, PCE core inflation index, is non-housing-related core services. And that’s really a function of the labor market, largely. The biggest cost, by far, in that sector is labor. And we do see a very, very strong labor market, one where we haven’t seen much softening, where job growth is very high, where wages are very high. Vacancies are quite elevated, and, really, there’s an imbalance in the labor market between supply and demand. So that part of it, which is the biggest part, is likely to take a substantial period to get down. > The other—you know, the goods inflation has turned pretty quickly now after not turning at all for a year and a half. Now it seems to be turning. But there’s an expectation, really, that the services inflation will not move down so quickly, so that we’ll have to stay at it, so that we may have to raise rates higher to get to where we want to go. And that’s really why we are writing down those high rates and why we’re expecting that they’ll have to remain high for a time.

https://www.federalreserve.gov/mediacenter/files/FOMCprescon...

The unemployment part can't indicate current state either because it usually doesn't spike until months afterwards. We can easily be in a recession with unemployment still being low.

The principles of the economy are quite clear. If people have incentive to do something, they will. If you alter incentives, you alter behavior, everything stems from that.

The problem with making predictions is that the macro economy has billions of variables which obviously all cannot be realistically modeled. That doesn’t invalidate the validity of theory. Economic theory works just the same as physics if you were able to observe and model every value accurately. Most physics problems deal with far fewer variables and can be simulated and replicated quite easily.

In this case its easy to predict because Powell has indicated for all intents and purposes that he will create a recession. And if he wants to, he 100% has the power to do it regardless of any other variable.

Rate of CPI change is declining on a MoM basis due to one time fiscal headwinds/supply normalization. The demand side has not been addressed at all, with nominal GDP growth close to 10% YoY and the tightest labor market in history along very high wage growth numbers.

If the Fed doesn’t raise unemployment before loosening policy, CPI will rebound due to the level of labor market tightness and wage growth.

It’s possible the Fed will use declining headline CPI to justify pivoting prior to rise in unemployment, but this will almost certainly turn out to be a mistake and require even higher rates a year or two out.

If the Fed pivots before actually triggering a solid softening in the economy, all assets will rally and labor market will retighten.

They made exactly this mistake many times in the 70s and 80s. The only way out at this point is to keep policy tight until a recession event kicks off