What Is a Rolling Recession?
The U.S. Economy has been in a Rolling Recession. The term refers to a situation in which economic downturns affect different sectors or regions of an economy at different times or with varying degrees of severity. Instead of a broad-based economic recession that impacts the entire economy simultaneously, rolling recessions are characterized by localized or sector-specific contractions that can spread over time. In a rolling recession, certain industries or geographic areas may experience economic decline, while others remain relatively stable or grow. This phenomenon can be driven by various factors, including shifts in consumer demand, changes in technology, global economic conditions, government policies or changes in expectations. As a result, the overall economic impact may be less severe compared to a traditional recession, but it can be challenging to address specific pockets of economic distress since the interest rate, for example, is a blunt tool affecting a broad swath of the economy.
The current rolling recession began in the housing market and is now poised to impact consumer spending. Despite governmental support and a strong labor market, diminishing purchasing power is starting to strain consumption, with expectations that various consumer sub-sectors will soon feel the pinch. The credit-card debt has jumped along with the delinquency rate. As consumption wanes, business investment is likely to retract, following already visible weaknesses in manufacturing and equipment spending, leading to an anticipated inventory correction.
This staggered weakening across sectors means that, unlike in a typical recession, the aggregate economy might continue to expand albeit at a slower speed, averting the traditional scenario where real GDP contracts for consecutive quarters. The catalyst for this rolling recession is the accelerated pace at which information travels today, in contrast to the slower information flow of the past. Modern technology and a more transparent Federal Reserve enable individuals and businesses to act preemptively, adjusting their decisions in anticipation of policy changes. This forward-looking behavior can trigger a chain reaction. For example, the housing sector anticipated tighter monetary policy and home sales rose and began to fall before the mortgage rate started rising. The earlier preemptive layoffs in the high-tech industry anticipating a recession are another example of a rolling recession.
The implications for monetary policy are significant. Since various sectors will likely have experienced their individual downturns by year's end of 2024, monetary policy has effectively moderated growth, as evidenced by a deceleration in inflation, albeit not down to the 2 percent target. However, the concern is that if the Federal Reserve continues to increase interest rates, it may inadvertently cause a full-blown recession, with a simultaneous and comprehensive economic slump. The suggestion, therefore, is for a more cautious approach: pausing rate hikes to observe the economy's response, thereby mitigating the risk of triggering a widespread recession. The recent slowdown in payroll employment and cooling inflation supports a cautious policy.
In summary, the analysis of a rolling recession, with its sequential sectoral downturns and the crucial role of information velocity and policy anticipation, underlines the need for astute and proactive economic policies. These policies must account for the intricacies of modern economic dynamics, balancing between encouraging growth and preventing a classical recession.