ANGOLA — Marek Kolar, associate professor in Trine University’s Ketner School of Business, says the U.S. economy is heading toward, and maybe already is, in a recession, one that could possibly be worse than 2008.
Kolar’s analysis comes as numerous people — particularly in the recreational vehicle industry that is strong in this area — are predicting a downturn in the economy.
“The Fed recently reversed its policy of normalizing the interest rate, and proceeded to lower its federal funds rate target at its last two meetings in September and July,” Kolar said. “In its statement, the Fed pointed to weakening business fixed investments and exports, suggesting the economy is slowing down.”
There seems to be a conflict between what the Fed is saying about inflation and the actual consumer price index.
“Even though the Fed claims the inflation rate is below its 2% target (according to its preferred personal consumption expenditure index), the core CPI has increased 2.4% year-over-year in August 2019 and the annualized growth rate of the U.S. money supply, regardless of (how it’s measured) has picked up from close to 3% a year ago to over 5% as of September 9,” Kolar said.
A number of factors, when put together, could mean a difficult recession, he said.
“When put together, the weakening economy, together with rising money supply growth, core CPI inflation rate above the Fed’s target, once again increasing size of the Fed’s balance sheet ($3.805 trillion on September 18), and growing national debt (over $22.02 trillion as of the second quarter of 2019), all seem to make a stagflation scenario more and more likely in the near future. If, indeed, there is a recession combined with inflation rate above 2%, and rising, the Fed may find itself unable to effectively address the situation and we may see a recession that is worse than the recession in 2008,” Kolar said.
Kolar offers some advice to the Fed and a few thoughts on how a recession might play out, based on data he’s studied from Fred Economic Data of the Federal Reserve Bank of St. Louis.
As a recession seems to be unavoidable, in my opinion the Fed should focus on its stable prices mandate and keep the inflation rate from rising above its 2% target, even if it means letting the economy go through a period of a severe recession,” Kolar said. “A period of recession would lead to curing some of the underlying imbalances, such as high levels of household and corporate debt, excess of imports over exports and interest rates well below historical levels. As a result, the economy may be able to start growing again consistently at rates close to 3% or above.”
Kolar holds a bachelors degree from Northwood University, a masters degree from Western Michigan University and a doctorate in macroeconomics from Michigan State University.