SAN DIEGO—If you pay attention to many headlines, the country’s economic future looks bleak, if not downright frightening. However, Christopher Thornberg sees a real breakdown in the narrative versus reality.
“Now, I’m not saying everything is fine,” the founder of Beacon Economics said during an NCSL Forecast ’23 session titled “Worrying About the Wrong Recession.” “I appreciate that we have some mixed signals.” But, considering a 3.7% unemployment rate, a record level of U.S. industrial production and strong consumer spending, Thornberg said he’s looking at an economy running at full capacity.
“It certainly doesn’t seem like the economy is about to tip into a recession,” he said.
“It’s going to get chilly, but it’s not going to melt down. In other words, the fundamentals are solid, the losses are going to be minimal.” —Christopher Thornberg, Beacon Economics
So, what’s going on? According to the economist, we’re suffering from a stimulus hangover.
Thornberg said that while the pandemic was a tragic human circumstance, it caused nowhere near the economic shock many economists predicted it would.
“The pandemic was never going to be a depression-causing event,” he said.
The pandemic did, however, cause what Thornberg described as “one of the most ridiculous outpourings of stimulus” the federal government has ever made to the U.S. economy. And when you overstimulate the economy, he said, inflation happens.
Yes, he noted, asset markets are exploding and there are all sorts of negative headlines out there. But, he said, when you look at the numbers, particularly those of U.S. consumer spending, you find a phenomenal amount of pent-up consumer demand.
“And while I don’t think it’s going to be, shall we say, a wonderful economy in 2023, the problems in the asset markets being driven by this hangover are not big enough to offset all that consumer demand that still sits out there,” he said.
Other positive signs, according to Thornberg, include improvements in the supply chain and the high quality of debt and massive amount of equity in the housing market.
“It’s going to get chilly,” he said, “but it’s not going to melt down. In other words, the fundamentals are solid, the losses are going to be minimal. And I don’t see the problems in the asset markets going over into the broader economy or into the debt markets.”
Still, things aren’t 100% fine, Thornberg said.
‘Brittle Economy’
“An inflationary economy is a brittle economy,” he said. “What this means is that while I would expect we’re not going to have a recession in 2023, and probably not in 2024, it doesn’t mean that something couldn’t happen. Some real shot could hit our economy and our economy is not going to be able to deal with it the way it would in healthier economic times.”
The classic case of that, he noted, was the mid-1970s recession, caused in large part by the oil crisis. And, Thornberg added, it’s important to remember recessions start with a big pullback in consumer demand. The Great Recession, for example, was kicked off in 2007 by the collapse of the subprime mortgage bubble. And, in 2008, when households suddenly recognized that they weren’t as wealthy as they thought they were, they stopped spending to start saving.
But while the Great Recession was a nine-year cycle of six quarters down and about seven years to get back to normal levels of economic activity, the pandemic was the exact opposite, Thornberg said.
“The pandemic was about eight weeks down, and really, within a year, we were almost back to normal levels of economic activity,” he said. “So, we’re catching up. Inventories are starting to pick up, the global supply chain pressures are cooling off, but we’re still overspending. And, of course, with overspending comes inflation. Simple as that.”
And Thornberg said this is happening across the globe. “Most parts of the world overstimulated, and most are suffering from these kinds of inflationary pressures. Not a surprise here.”
The key to avoiding a recession, according to Thornberg, is “the mighty U.S. consumer.”
“If the consumer is healthy, they can power us through a lot of rough waters,” he said. “If they’re not, they will sink with the ship.” And when you look at consumer durable spending demands, travel rates, restaurant spending—“to me, it doesn’t seem like people are suffering,” he said.
Still, he predicted, it’s going to be a bumpy economic path ahead. “Asset values are going to continue to fall. Liquidity is going to dry up soon, no doubt about it. The construction market is going to get very cold, and I think inflation will continue to run hot for at least the next couple years. With that in mind, wealth and income will continue to drive consumer spending.”
Lesley Kennedy is the director of publishing and digital content at NCSL.