Paul Krugman: The US economy is looking pre-recessionary

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The United States probably (probably) hasn’t entered a recession yet. But the economy is definitely looking pre-recessionary. And policymakers — which right now basically means the Federal Reserve — need to move quickly to head off the risks of serious economic deterioration, writes at ‘The New York Times’ Paul Krugman, a prominent US economist, professor at M.I.T. and Princeton University, Nobel laureate in economics.

And we can only hope that the recent plunge in long-term interest rates, which reflects expectations of future Fed cuts, will be enough to avert a gratuitous economic slump.

Why do I say that the economy looks pre-recessionary? The most important factor is the unemployment rate, which has been gradually trending up over the past few months. Friday’s employment report triggered the Sahm rule, which says that a sufficiently large rise in the unemployment rate is a strong indication that a recession has started.

Am I 100 percent sure that we’ll have a recession unless the Fed moves quickly to cut rates? Of course not — nothing is certain in economics, or in life more generally. But policymakers who wait for perfect certainty before acting will always move too late.

So how did we get to this point? The Fed increased interest rates a lot in response to the 2021-22 surge in inflation. I didn’t oppose that move; I don’t think the Fed had a choice, given the perceived risk that inflation might become entrenched in the economy the way it did in the 1970s.

For a long time, our economy held up remarkably well despite very high interest rates; now the cracks are starting to show.

What’s especially galling about the current situation is that we may be about to snatch defeat from the jaws of victory. As of right now, America has basically achieved what many economists had considered impossible: a soft landing, in which we managed to get inflation way down without high unemployment. But we are increasingly at risk of experiencing a lot of unnecessary pain simply because the pilot waited too long to pull up the plane’s nose.

One more thing: If the Fed cuts rates in September, it will probably face a firestorm of criticism from Republicans accusing it of trying to help Kamala Harris defeat Donald Trump in the presidential election. And yes, a rate cut would probably help Democrats, largely because it would help drive home how successful America has been in bringing inflation under control.

But politics shouldn’t, and I hope won’t, affect the Fed’s decision. For the fact is that the economic case for major rate cuts is overwhelming; the Fed would be acting politically if it didn’t respond to that economic case simply because the election is looming.

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