The current narrative about the economy is that price rises are a worrying sign. Long-term price inflation devalues people’s savings, discourages investment, and can create shortages. The textbook remedy is for central banks to raise interest rates, essentially making money more expensive, driving prices back down. But according to a new study, there are powerful signs that the US economy is going into recession, something that will likely impact the UK and other economies around the world. If that’s the case, raising interest rates should be the last thing central banks should be doing now, argue ex-Bank of England advisor, David Blanchflower and Alex Bryson.

All is not quite as it seems in the world economy.  Whilst the worst of the COVID pandemic may be over in developed economies its effects continue to reverberate both here and on the other side of the Pond.  Indeed, in a paper we have just released we argue that the US economy is going into recession about now. You might not think so, judging by the markets and by labour market statistics which seem quite buoyant.  But if you focus on consumer and producer expectations about the near future you get quite a different picture – one which is eerily familiar to those who remember the recession of 2008.  Strikingly, these indices gave early warning to all six of the prior US recessions since 1979.

Those consumer and producer expectations indices tell us how economic actors are feeling about the future – the future of the economy, of unemployment and their own household finances.  They are important because, as we have shown in a series of papers, they are predictive of what happens in the economy some 6-18 months later. Back in 2007 they were pointing to economic downturn but few paid attention until it was too late.  The same is true today.  These indices have dropped in the last six months at a rate that is comparable to what happened during the recession of 2007/2008.

Data from across the eight biggest states in the US showed a sharp decline in consumer expectations in the spring of 2021, just as they did in 2007.  There are some similar signs of worsening consumer confidence in the UK.  The YouGov Consumer Confidence Index fell n October and the Institute of Director’s Economic Confidence Index “fell off a cliff” in September.