'Dr. Doom' Warns of Severe Recession

'Dr. Doom' Warns of Severe Recession

By Yuval Rosenberg and Michael Rainey
Monday, July 25, 2022

Good Monday evening and welcome to what promises to be a critical week for the economic data and congressional action. Here’s a look at some of the big news ahead.

Recession? Budget Reconciliation? A Big Week for Biden

Is the United States in a recession, or heading for one? Is red-hot inflation going to cool down? Just how far is the Federal Reserve going to go in its efforts to rein in those price increases? And will Democrats be able to deliver on their promises to bring down health care costs?

We’ll get some answers to those questions, or at least some insights into the state of the economy and Democrats’ long-frustrated legislative efforts, this week.

* The Federal Reserve is expected to raise interest rates by another 75 basis points at the end of its two-day Federal Open Market Committee meeting Wednesday.

* Also Wednesday, the Congressional Budget Office will publish its “2022 Long-Term Budget Outlook,” its latest projections of how economic trends, demographics, rising health care costs and legislation will affect federal spending and revenue over the next 30 years.

* Thursday morning will bring the first estimate of gross domestic product for the United States for April through June — with a chance that the report will show the economy contracted for the second straight quarter, prompting further debate about whether we’re in a recession (see more on this below). We’ll also see other economic data this week, including readings on consumer confidence and inflation.

The recession question: “Truth is, no one really knows if the economy is already in a recession or headed for one,” CNN’s Christine Romans writes. “Generally marked by two consecutive quarters of negative GDP growth and rising unemployment, a recession is officially determined after the fact by a committee of economists at the National Bureau of Economic Research. There is no ‘recession light’ that goes off at the White House and on Wall Street.”

Crunch time for Democrats: On the legislative front, Democrats are racing to finalize their budget reconciliation package — the formerly massive spending bill that’s now been massively scaled back to focus on lowering prescription drug prices and extend increased Affordable Care Act subsidies.

With a planned August recess looming for the House after this week and the Senate after next, both chambers will be pushing to polish off a number of key agenda items, including the reconciliation bill and the “CHIPS-Plus” bill containing $76 billion in subsidies and tax breaks for the semiconductor industry and some $200 billion in other provisions aimed at improving competitiveness with China.

Democrats started the week awaiting guidance from the Senate parliamentarian on their big health care package — and they are reportedly tweaking their drug-pricing plan to ensure that it meets the special rules for a budget reconciliation bill that can be passed along party lines. Democrats are planning to submit revised text to the parliamentarian, Politico reports, noting that the changes “may yet force the party to further delay its plans for Senate consideration of the bill.”

The bottom line: The rush is on for real in Congress. Democrats’ plans may have been further complicated by Sen. Joe Manchin (D-WV), who announced Monday that he has tested positive for Covid and will be working remotely for the time being. House Majority Leader Steny Hoyer (D-MD) reportedly said that if the Senate can pass the reconciliation bill soon, the House would return early from its August recess to take it up. As for the economy, the backward-looking data we get this week — and all the spin that comes with it — may matter less politically than how Americans feel things are going. Right now, that isn’t good for Biden and Democrats, but it’s not November yet.

3 Views on the Potential for Recession

“There are many reasons why we are going to have a severe recession and a severe debt and financial crisis. … The idea that this is going to be short and shallow is totally delusional.”

— Economist Nouriel Roubini, who predicted the housing crash 15 years ago and is known as “Dr. Doom,” in an interview Monday with Bloomberg. In making his call for a more severe downturn, Roubini cited historically high debt ratios for advanced economies and tightening monetary policy. “We have no fiscal space,” Roubini said.

“I think there is a very high likelihood of recession. When we’ve been in this kind of situation before, recession has essentially always followed. When inflation has been high and unemployment has been low, soft landings represent a kind of triumph of hope over experience. I think we’re very unlikely to see one.”

— Former Treasury Secretary Larry Summers, speaking to CNN’s Fareed Zakaria on Sunday. Summers also said that there is a significant risk that the Fed will fail to control inflation, even with an economic slowdown. “Whether or not we put inflation fully back in the bottle with that recession, I think is very hard to judge at this point. … I think there is also a greater risk of stagflation and this episode being with us for some number of years than the market is currently discounting.”

“I would be amazed if the NBER would declare this period to be a recession, even if it happens to have two quarters of negative growth. We’ve got a very strong labor market. When you’re creating almost 400,000 jobs a month, that is not a recession.”

— Treasury Secretary Janet Yellen, appearing on NBC's "Meet the Press" Sunday. “A common definition of recession is two negative quarters of GDP growth,” Yellen explained. “And many economists expect second quarter GDP to be negative. … But I do want to emphasize: What a recession really means is a broad-based contraction in the economy. And even if that number is negative, we are not in a recession now. And I would, you know, warn that we should be not, not characterizing that as a recession.”

At the same time, Yellen acknowledged that there are worrisome signs on the horizon. “Growth is slowing globally,” she said. “And I'm not saying that we will definitely avoid a recession, but I think there is a path that keeps the labor market strong and brings inflation down.”

With Social Agenda Stalled, Democrats Prepare to Approve Billions in Corporate Tax Credits

Democrats’ ambitious social agenda under President Biden included child tax credits paid directly to families and support for green energy investment, among many other things, but like so many of their plans, those programs have fallen by the wayside. Instead, Democrats are preparing to vote for $24 billion worth of tax credits intended to boost high-tech chip manufacturing in the U.S., part of a $76 billion package benefiting that industry.

As Politico’s Brian Faler reports, some lawmakers are disappointed by the party’s shift from pushing for public investment to further subsidizing private industry. “It looks terrible,” Sen. Michael Bennet (D-CO) told Politico.

Some Democrats emphasize that the tax credits are a matter of national security, ensuring that the country can manufacture a key piece of technology while boosting the economy. “This will create a lot of prosperity in my state, and provide a lot of people good-paying jobs,” said Sen. Sherrod Brown (D), whose home state of Ohio is expected to receive a new manufacturing facility.

Still, the relatively quick agreement on the contours of the semiconductor bill reminds some Democrats of what could have been with their larger spending package, if they had been able to win the cooperation of conservative members of their caucus like Sen. Joe Manchin (D-WV).

“The ease with which lawmakers are moving the break contrasts with Democrats’ struggles with their reconciliation plans, though the semiconductor plan violates many of the conditions Manchin had laid down for that legislation,” Faler writes, citing the bill’s failure to cover all of its costs, as Manchin had insisted for the social spending bill.

One key difference is that subsidies for chip manufacturing have plenty of bipartisan support – as well as bipartisan opposition. Condemning the plan as “massive corporate welfare,” Senate Budget Committee Chair Bernie Sanders (I-VT) joined with some of his more conservative colleagues in opposing the bill.

“There is no doubt that there is a global shortage in microchips and semiconductors, which is making it harder for manufacturers to produce the cars, cellphones and electronic equipment that we need,” Sanders said. “But the question we should be asking is this: Should American taxpayers provide the microchip industry with a blank check of over $76 billion at a time when semiconductor companies are making tens of billions of dollars in profits and paying their executives exorbitant compensation packages? I think the answer to that question should be a resounding ‘No.’”

Across the aisle and on the other side of the Capitol, Rep. Kevin Brady of Texas — the senior Republican on the House Ways and Means Committee who played a key role in passing the Trump tax cuts in 2017 — expressed his opposition to the bill. “It would provide large subsidies to a limited group of companies, which creates, I think, an unjustified windfall for companies with projects already underway,” he said.

On top of that, the supposedly temporary tax breaks could end up sticking around. “As we know, there are a few temporary tax credits [already in the code] — they tend to get extended into eternity,” Brady said.

Poll of the Day: Democrats’ Infrastructure Problem

President Joe Biden signed the $1.2 trillion bipartisan Infrastructure Investment and Jobs Act into law on November 15, 2021, providing $550 billion for a range of new investments and giving the president and his party hope that they’ll have a landmark achievement to tout come election time. But eight months later, just 24% of likely voters know the bill was enacted, according to a new poll by center-left think tank Third Way and Impact Research. Nearly four in 10 likely voters say they “don’t know” the status of the bill while another 30% say lawmakers are still working on the legislation.

“Given that a large share believes the deal is still being worked on in Congress, it is clear that voters are confusing the BIF with BBB, which, of course, has not passed,” Third Way’s Aliza Astrow and Jim Kessler write, using the acronyms for the bipartisan infrastructure framework and Democrats’ Build Back Better bill. (Those abbreviations, useful as they may be for policy wonks, certainly could be contributing to the confusion among voters who don’t follow every legislative development.)

“We were so focused on passing the next thing, we forgot to tell people about it. And that’s a huge mistake,” Rep. Scott Peters (D-CA) told Politico, which first reported on the poll.

The online poll of 2,000 likely 2022 voters was conducted June 2 – 9 and has an overall margin of error of 2.2 percentage points.


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