A strong labor market and high wages mean the Fed has to choose between recession and runaway inflation.
growth, even if nominal, more than compensates for margin contraction for now, resulting in near-record profits. Against this backdrop of profits and strong labor demand, firms are reluctant to turn to layoffs quickly, thus keeping the labor market and spending strong, which in turn reinforces firms’ sales and profits.This would all be good news if it didn’t stoke the fire of inflation, which has proved too strong, too broad, and too fast moving.
In fighting inflation, the Fed is now much more accepting of the risk of causing a recession, simply because the risks to the economy are far more consequential than in 2021. That recession is increasingly likely in 2023, though the strength suggests it’s not imminent. Meanwhile, the hopes of a “soft landing” are fading as that strength forces higher rates that strangle the economy., akin to the banking crisis of 2008. Risks of financial accidents are rising as years of very low rates are being reversed. But those are less likely to cripple banks and disrupt lending, a hallmark of financial recession and systemic damage.
Hunkering down is especially likely to be a strategic error in industries that will face tight capacity — either on the production or labor side — after the recession. They should use the recession to build and hire selectively to be in a strong position to capture incremental share on the other side.relative to peers and relative to the economy broadly.
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