Credit standards are far higher today than they were during the early 2000s, and on average potential borrowers are going into this housing crunch with much healthier balance sheets. The implication is that home-price declines will not necessarily lead to a big reduction in consumer spending.
There is one final, intriguing factor that indicates the U.S. may not be done with inflation: The large declines in stock prices could spur hiring freezes by executives eager to prop up overall earnings growth. The U.S. job market is currently as tight as it has ever been, with nearly two job openings per unemployed worker.
Larry Summers cites this this tightness—and the associated levels of wage growth—in his argument that inflation can’t be brought down without a recession. (Summers is a paid contributor to Bloomberg Television.) That’s because a looser labor market typically comes about through a rise in layoffs. Potential layoffs lead workers to accept smaller or nonexistent raises and cut their own spending.
Right now, however, the number of unemployed workers per job opening could triple without a rise in layoffs. That would dramatically ease employers’ difficulties in hiring workers, but it’s unclear how it would affect existing workers’ wage demands or spending habits.
On the one hand, layoffs are much more threatening to most workers than a decline in job openings. On the other, a sharp drop in openings could shift the labor market back to the equilibrium it was in just before the pandemic, when unemployment wasn’t much higher but inflation and wage growth were both contained.
In any case, it’s clear that, with prices rising at near-record levels, traditional inflation-fighting tools will continue to be necessary. So workers may soon have to accept that a full-blown recession—with rising layoffs and unemployment—is unavoidable.
Karl W. Smith is a Bloomberg Opinion columnist. Previously, he was vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina.