“You have to blow the dust off your economics textbook. This is going to be a classic recession,” Tom Simons said in a recent CNBC article. Simons is a money market economist at Jeffries, a multinational investment banking company. Consumers seem to agree with his assessment. According to a Pew Research Center poll, 82 percent of American adults say that economic conditions are poor or fair.
Economist William Dudley, a senior research scholar at the Griswold Center for Economic Policy Studies at Princeton and former President of the Federal Reserve Bank of New York, was less sure.
“[The] evidence is not very compelling that we are in a recession,” said Dudley.
Amid national discussion of an impending economic recession, multiple economics professors spoke to The Daily Princetonian about their predictions of an economic downturn — or lack thereof.
Princeton economists express uncertainty on recession
For the past six months, a number of economists have projected a looming recession, with Bloomberg News reporting that economists predicted a 70% chance for one in 2023 and an NPR survey revealing that 98% of CEOs are preparing for recession.
The Federal Reserve’s (the Fed) interest rate increases have reduced economic activity in response to inflation and high prices which are still causing many Americans hardship. On Feb. 1, the Fed raised interest rates for the eighth time this year. These interest rate hikes have had lasting impacts on many sectors, particularly housing.
In the past, the economy has typically gone into a recession after periods of relatively high inflation.
Henry Farber ’77, the Hughes-Rogers Professor of Economics, suggested that recovering inflation may mean that a recession is less likely. In an interview with the ’Prince,’ he said the “signs are very good — the things that fed the inflation, like the pandemic and supply chain issues, seem to be easing.”
Farber went on to characterize current inflation levels, stating: “Fundamentally, in the last 6 months, inflation has been about 2% at an annual level,” which policy makers agree is an acceptable rate.
In fact, the only thing Farber believes may point to a recession is the “fairly serious policy” by the Federal Reserve Board, which would “put negative pressure on the labor market to ease wage demands.”
“It makes it expensive to borrow, companies want to invest less, and people want to buy less, which has negative effects on the demand for labor,” Farber said.
In an email to The Daily Princetonian, Princeton Professor and former Vice Chair of the Federal Reserve Alan Blinder ’67 refused to make a firm prediction. He told the ‘Prince,’ “My personal guess is that it’s about 50-50. Whether or not there is a recession depends on many things including: How much higher the Fed pushes interest rates, how much markets get jittery about the debt ceiling issue, what happens in Ukraine, and Donald Rumsfeld’s ‘unknown unknowns.’ None of these are reliably predictable.”
Blinder was referring to a theory by former Secretary of Defense Rumsfeld ’54 that the most dangerous problems are the “unknown unknowns,” the ones “we don’t know we don’t know.”
Given the uncertainty, Blinder wrote to the ‘Prince,’ “Citizens around the world should be aware of the risk of recession and prepare themselves for it—if they can—by e.g., having a little saving nest egg to tide them over if necessary.”
Risks of a looming recession weigh heavily on Princeton students. Research shows that college graduates who start working during a recession earn less for at least the first ten years of their career.
Dudley stated that the risk of recession should not generate concern among graduating Princetonians who are entering the job market.
“The job market is very strong, and the unemployment is lowest in many years,” he said, referencing the U.S Bureau of Labor Statistics's annual labor report. Dudley explained that, “[the] Fed will make the labor market more vibrant if necessary but that currently, there are nationally 1.9 unfilled jobs to 1 worker, this ratio being 1.2 before pandemic.”
Dudley speculated on the reasons for this sharp increase in the number of open positions. “Many people retired early, legal immigration to the US stopped during the pandemic, people got covid, among other things,” he said.
Blinder had the same 50-50 prediction for the future of the job market as for the recession. “This year’s college graduates are in an interesting position. It’s hiring season, and jobs are readily available right now. But there’s a chance, call it 50%, that the job market will look much worse later this year. So I wouldn’t wait until June,” he said.
Fitting with his prediction of a strong economy going forward, Farber told the ‘Prince,’ “There’s no sign right now that it's going to be a tough hiring season. It is true that some tech companies have been announcing layoffs, but I don't know what that means for their new hires.”
Dudley emphasized that in the case of the job market taking a turn for the worse, “It's not graduates of Princeton who will be impacted. People who have less skills, less work history, and were hired more recently, will bear the brunt of the impact.”
However, he said that “ironically, most layoffs recently are in the tech sector,” a field that Princeton students often flock to. Twenty-one percent of employed Princeton graduates from the classes of 2016- 2021 work in tech, according to data from the Center for Career Development.
A history of bad predictions
Blinder and Dudley addressed why so many predictions about the recession have been wrong or inaccurate.
“Economists around the world have never been very good at predicting recessions. There is no reason to think that today is any different, and indeed, opinions differ hugely,” Blinder wrote.
Similarly, Dudley said that “forecasting is a little bit of skill and a lot of luck.” He added that in his own predictions, “inflation turned out to be worse than what I was expecting.”
In the past, economists have erroneously predicted a healthy economy ahead. Prior to the Great Recession of 2008, those in the field largely got it wrong in predicting the future of the markets. The New York Times reported that former University professor, Princeton honorary degree recipient, and former chair of the Federal Reserve Ben Bernanke was an outlier in “warning of the risk of a severe recession as the nation entered into a presidential election year,“ but “struggled to persuade his colleagues, and at crucial junctures [did] not push forcefully for stronger action.”
Addressing the frequent mispredictions, late longtime Princeton economics professor Uwe Reinhardt, a recipient of multiple honorary degrees from the University, opened the syllabus of a spring 2014 class titled “Introductory Korean Drama” with the following words: “After the near collapse of the world's financial system has shown that we economists really do not know how the world works, I am much too embarrassed to teach economics anymore, which I have done for many years. I will teach Modern Korean Drama instead. Although I have never been to Korea, I have watched Korean drama on a daily basis for over six years now. Therefore I can justly consider myself an expert in that subject.”
While the pandemic created more friction such as supply disruptions that the economy is not set up to respond to, Dudley expressed that if there will be an economic downturn, it will be pretty mild.
Abby Leibowitz is a News contributor for the ‘Prince.’
News contributor Olivia Sanchez contributed reporting.
Please direct any corrections requests to corrections[at]dailyprincetonian.com.
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