Americans are worried a recession is looming—and according to a top economist, they ought to be.
Steve Hanke, a professor of applied economics at Johns Hopkins University, said this week that he believes the U.S. is heading for a “whopper” of a recession next year.
In an interview with CNBC’s “Street Signs Asia” on Monday, Hanke argued that a major economic downturn had been made inevitable due to U.S. money supply soaring and stagnating.
“We will have a recession because we’ve had five months of zero M2 growth, money supply growth, and the Fed isn’t even looking at it,” he said. “We’re going to have one whopper of a recession in 2023.”
M2 is a measure of U.S. money supply, which includes cash, checking and savings deposits, and shares in retail money market mutual funds. Since the beginning of the year, the M2 reading has plateaued, but the supply of money in the U.S. surged throughout the pandemic, according to official data.
Hanke said on Monday that throughout world history, there had never been sustained inflation—inflation above 4% for more than two years—that had not been caused by excessive growth in the supply of money.
“We had [that M2 growth] starting with COVID in February of 2020,” he told CNBC. “We had an unprecedented growth in the money supply in the United States, and that is why we are having inflation now—and that’s why, by the way, we will continue to have inflation through 2023 going into probably 2024.”
Last year, Hanke’s research predicted that U.S. inflation would be somewhere between 6% and 9% in 2022.
U.S. inflation cooled in July, but still remained elevated with the Consumer Price Index increasing 8.5% from a year earlier.
“We hit the bull's-eye with that model,” Hanke said Monday, referring to his inflation simulations. “Now the model is running at between 6% and 8% for the end of this year on a year-over-year basis, and 5% at the end of 2023 going into 2024.”
The Federal Reserve aims to keep inflation at around 2%, and has been trying to reduce inflation this year without triggering a recession.
However, Powell himself warned last week that American households and businesses should brace for “some pain” as the central bank’s efforts to bring inflation under control were “likely to require a sustained period of below-trend growth.”
Recession predictions
There is a broad consensus among many of the world’s top economists and market watchers that a recession is on the horizon, with many believing inflation will be difficult to tame and force the Fed to take drastic action.
According to a recent Bank of America survey of asset managers, recession expectations among investors have reached an all-time high.
Consumers are also nervous, with polling showing that 70% of Americans are worried about an imminent recession.
Earlier this month, top economist Mohamed El-Erian warned that inflation “will be sticky” and despite recent signs that price growth may be slowing, high inflation could become “entrenched.”
The veteran economist argued in recent weeks that while the U.S. is “simply not in a recession” right now, the risk of a recession was high—and “getting higher and higher.”
Michael Spence, Nobel laureate and dean emeritus at the Stanford Graduate School of Business, told Bloomberg this month that while recession fears were receding, he did not believe they were over.
“There are still people who are worried that inflation will be persistent enough to force the Fed to really clamp down,” he said in an interview. “There’s still a non-trivial possibility that we’ll have a recession or a dramatic slowdown.”
Meanwhile, renowned economist Stephen Roach told CNBC this week that the U.S. needed a “miracle” to evade a recession, and JPMorgan Chase CEO Jamie Dimon said recently that he saw only a 10% chance of an economic slowdown that did not lead to a recession.
However, others are less gloomy about the outlook for the U.S. economy.
“Little of the data I see tells me the U.S. is on the cusp of a recession,” Citigroup CEO Jane Fraser said in the company’s earnings call last month.
Diana Furchtgott-Roth, George Washington University adjunct economics professor and former chief economist at the Department of Labor, told PBS on Monday that she had a positive long-term outlook.
“I am optimistic that the economy is going to get better in the future and that we are going to have a mild recession, which is going to get inflation out of the economy, and then the economy is going to continue to increase,” she said.
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