Could a Housing Recession Take Down the U.S. Economy?
Bloomberg columnist Conor Sen returns to talk with Derek about the biggest risks the economy faces in the next year
One year ago, it was a matter of conventional wisdom among experts that the U.S. was on the brink of a recession. They were wrong. The latest GDP report showed America’s real output growing at a 4.9 percent annualized rate. That’s huge. But just as we zagged a year ago, when we criticized recession predictions, I want to zag again today. It is a matter of broad conventional wisdom that the U.S. economy right now is doing really well. And, for now, it is. But challenges abound, including “higher-for-longer” interest rates, a recession in the apartment construction market, and ongoing global mayhem. Bloomberg columnist Conor Sen counts the five biggest risks to economic growth in the next year—and makes his official economic prediction for 2024.
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In the following excerpt, Derek talks with Conor Sen about why the U.S. did not experience the recession that many economists predicted it would in the past year.
Derek Thompson: So a year ago, 15, 16 months ago, you came on the podcast and you helped me swing a big fat wrecking ball at this idea that the U.S. was on the verge of a recession. What I want to do with you now is twofold. First, we’re going to take a victory lap. We’re going to take an informed and information-dense victory lap to explain—I don’t want to say we—why you were right about the U.S. avoiding a recession, even as interest rates just went up and up and up. Second, I asked you to help me scout the five biggest bright, flashing risks to the U.S. economy right now. If the first question is, “How did so many experts and economists and banks and talking heads whiff so badly on this recession call?” the first mystery to unravel is, I think, actually a very specific one.
Historically, rising interest rates boa constrict the economy. A constricted economy means higher unemployment, and then higher unemployment means yada, yada, you get less spending, and you get a recession. All of this seemed obvious to so many economic experts 16 months ago, and none of it happened. How do you think the U.S. economy, for practically the first time in the last century, continued to add millions and millions of jobs and grow so quickly even as interest rates skyrocketed up in order to fight inflation?
Conor Sen: I’d say there were two main reasons, and the first one was that the state of the economy in the middle of 2022 was like a garden hose that was being crimped. There was all this water trying to get out, but it was really being constrained for a lot of reasons. A lot of people still hadn’t returned to the labor force, and oil production hadn’t normalized yet, and automobile producers hadn’t ramped up production yet because they couldn’t get semiconductors. That was the source of the inflation that was bothering everybody—you couldn’t get a restaurant reservation; lumber was really expensive—but it also was the source of relief down the road because people did join the labor force, and lumber became more available. We’re now producing a million more barrels of oil every day than we were a year ago. Even though rising interest rates and tighter financial conditions constrained growth, there was still all this sort of growth in the pipeline that could be unlocked that just needed time to work itself out on the supply chain front.
The second reason was—
Thompson: Can I just stop you there? Because I have used a similar sort of crimped-garden-hose theory of everything to explain much of the chaos of 2021 and 2022, because it did feel like chaos. I can’t get this reservation. I can’t find a flight. My furniture is backlogged six months. All sorts of concerns, both prosaic and luxury. But I didn’t anticipate the second half of the crimped-garden-hose theory of everything. The first half of that theory, the first implication of it, is that there’s going to be a lot of chaos. But the second theory is that there’s going to be a lot of liquidity. The water will flow. That is what we had. A lot of consumers had spent the previous few years constricting, pinching, as if with a garden hose, their own spending, their own service spending, their own luxury spending.
There was so much activity just begging to be released into the economy that it helped to counter the impact of higher interest rates. I didn’t make that prediction at the time when I was talking about crimped garden hoses, but it’s such an interesting and almost inevitable implication of the theory. I’m glad you pointed that out. What’s the second theory that you’ve seen that explains why we didn’t get the recession that everybody anticipated?
Sen: The second reason was that interest rates went from very low to very high in a short period of time, and if you owned bonds, that was a problem for you. But a lot of people didn’t own bonds. They just had houses with low mortgage rates that they locked in during the pandemic or corporations who borrowed money and locked it in for three or five or 10 years during the pandemic. If you had to borrow money starting in the middle of last year, it was painful, but a lot of people didn’t, and they could just sit on this cheap debt that they borrowed years ago. So they could ride it out, and they didn’t have to worry about where interest rates were because they didn’t have to borrow. Rates went up fast, but it didn’t really impact a lot of people right away.
This excerpt was edited for clarity. Listen to the rest of the episode here and follow the Plain English feed on Spotify.
Host: Derek Thompson
Guest: Conor Sen
Producer: Devon Manze
Subscribe: Spotify
