Remember the scary recession of 2024?

I’m kidding, of course. There was no recession last year. But a bunch of folks expected one, and they had good reasons. Now they’re worried about inflation again.

This isn’t how it should work. The economy swings from expansions, which can spark inflation when they’re too good, to recessions that reduce consumer spending and send unemployment higher. The details vary but the cycle used to be pretty reliable.

What is going on? Start with some history.

The 2020 recession wasn’t part of the normal cycle. Going into that year, the economy had issues but was hardly overheated. The recession happened only because a global pandemic induced fear, governments imposed various restrictions, and large parts of the economy simply stopped. You might call it a “voluntary recession.”

Before that, we had the Great Recession of 2007–2009. That one was both traditional and intense. Millions lost their jobs, businesses went bankrupt, and the government had to bail out banks.

In the normal course of things, the Great Recession should have been followed by a strong recovery and then another recession 5–7 years later. Yet it wasn’t.

Now, back to the present.

By early 2024, it had been about 15 years since the last authentically “cyclical” recession. That’s an extraordinarily long expansion, so expecting it would end soon was reasonable. But the Fed was more concerned about inflation and so kept interest rates high.

This produced a lot of grumbling that the Fed, by waiting too long to cut rates, would actually start a recession. There was some evidence for this, too. The historically low post-COVID unemployment rate started rising in late 2023, exceeding 4% in May 2024. That was still low, but the trend change looked ominous.

Source: FRED

Two months later, still-climbing unemployment triggered the “Sahm Rule.” That’s a signal recession is imminent and policymakers should dust off their stimulus tools.

And that’s not all.

The Treasury yield curve usually “inverts” ahead of a recession and had done so in July 2022. Historically, recession would start a year or so afterward. By 2024, it was past due.

All that finally convinced the Fed to change course. Jerome Powell said last August “the time has come” for rate cuts, and the first cut happened in September. Two more cuts followed.

What didn’t follow was… the economic downturn these cuts were intended to soften.

In fact, by December the Fed’s leaders had swung back to worrying about inflation. They decided to pause their rate cutting. We’ll see on January 29 whether they are ready to resume.

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Is recession still coming? No one knows. Most economic growth forecasts show continued growth, and there’s concern the Trump administration’s policies could push inflation higher.

Again, what is going on?

One possibility: The COVID-19 pandemic, and the policy responses to it, changed the rules. Maybe our previously reliable indicators just don’t work anymore.

That could be, but I think something bigger is happening. We are starting to see the economic consequences of demographic change.

Specifically, thanks to decades of falling birth rates and longer life expectancies, the number of working-age people has plunged relative to the number of older people.

This chart from a new Congressional Budget Office report shows the ratio of US population ages 25–64 to the number 65 and older.

Source: Congressional Budget Office

Back in the 1950s the US had more than six working-age people for each person over 65. Now it’s more like three and headed toward two.

Note also how this ratio bent downward around 2010. That’s when the oldest Baby Boomers (born in 1945) turned 65. They aren’t all retiring, but many are.

Retirees, by definition, have stopped producing but continue consuming. That means the ratio of producers to consumers is way out of balance and getting more so.

What happens when a smaller number of workers have to provide all the goods and services needed by a growing number of retired consumers? You get shortages, higher prices, inflation, and a generally grumpy population.

I wrote an article last year (see No More Recessions?) speculating this may be why unemployment has been so stubbornly low. With an uncurable labor shortage, it’s hard to imagine how recessions (at least in the traditional sense) are even possible anymore.

I might be wrong. But the fact so many indicators signaled a recession that didn’t happen, and still doesn’t appear imminent, says something is different now.

We should probably figure out what it is.

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See you at the top,

Patrick Watson
@PatrickW

P.S. If you like my letters, you’ll love reading Over My Shoulder with serious economic analysis from my global network, at a surprisingly affordable price. Click here to learn more.

• baby boom
• forecasts
• inflation
• recession