Former Treasury Secretary Larry Summers says he doesn’t think the U.S. is in recession now, but says there’s a 75% chance the economy tips into recession in the next 18 months.
“I don't think we're in a recession,” Summers told Yahoo Finance in an interview. “[But] given the difficulties associated with high inflation and bringing it down, the necessary monetary policy response, the odds that the economy will go into recession within the next 18 months are quite serious, and probably in the three quarters range.”
Summers says he thinks that if the economy gets into a situation where unemployment rises, it will rise quite substantially. “So I would expect sometime within the next two or three years, that the unemployment rate will have crossed 6%,” Summers said.
Summers' comments come after he and four former Treasury secretaries — both Republican and Democratic appointees — issued a statement supporting the Inflation Reduction Act. Summers was instrumental in getting Senator Joe Manchin to support the new bill, which is a slimmed down version of what had been known as the Build Back Better bill.
Still, Summers does not believe this legislation will be enough to contain inflation.
“This bill is certainly not sufficient to contain our inflation problem,” Summers said. “And even with the spill, we're going to have inflation problems for quite some time to come. The important thing, though, is that this is doing a whole set of necessary things for our country, while beginning the process of reducing inflation pressure.”
In a statement, the former Treasury secretaries said, "extra taxes levied on corporations do not reflect increases in the corporate tax rate, but rather the reclaiming of revenue lost to tax avoidance and provisions benefitting the most affluent."
Adding: "The selective presentation by some of the distributional effects of this bill neglects benefits to middle-class families from reducing deficits, from bringing down prescription drug prices, and from more affordable energy."
Asked about impacts on the labor market and corporate investment plans given some of the bills tax provisions, Summers said, if anything, overseas jobs are more likely to be brought home than anything else.
"I don't think the effects [of the bill] are likely to be harmful," Summers told Yahoo Finance. "The stimulus to renewable investment in particular...is likely to do far more to stimulate investment than closing various loopholes, which in some cases, probably encourage financial manipulation, rather than real productive investments."
Summers added: "And in fact, by expanding the taxation of their global income, relative to their domestic income, I actually think this could encourage jobs to be brought home."
'A serious error'
Summers' comments and the Biden administration's push to pass this bill come after GDP data out last week showed the economy shrank for the second-consecutive quarter in Q2. Two quarters of negative GDP growth meet the informal definition of a technical recession.
The Biden administration, however, has taken pains in recent weeks to note recessions are only formally called by the National Bureau of Economic Research. The NBER defines a recession as, "a significant decline in economic activity that is spread across the economy and that lasts more than a few months."
This slowdown in growth also comes as the Federal Reserve continues its campaign to raise interest rates to slow inflation, with several Fed officials just this week reiterating the central bank's commitment to bringing down inflation. Comments that come as investors have bid up stock prices and driven down bond yields amid doubts the Fed will be able to follow through on additional rate hikes and avoid recession.
Even with growth slowing, Summers says he thinks the Federal Reserve should keep the pedal to the metal when it comes to raising interest rates to cool inflation.
“If the economy looks like it's slowing, it will be tempting to stop raising interest rates, and indeed, people in the market are expecting that interest rates will come down, beginning in December or January,” says Summers. “I think that would be a serious error.”
Summers says he thinks inflation will be with us for some time given strong economic growth last year, along with supply-chain issues unless we have a recession. “I think we are unlikely to restore inflation to target levels in scenarios that don't involve a recession at some point,” he said.