Larry Summers says the economy could be headed towards a ‘Wile E. Coyote moment’

Larry Summers, former U.S. Treasury secretary, speaks during an Economic Club of New York event in New York, U.S., on Wednesday, May 16, 2018.
Larry Summers, former U.S. Treasury secretary, speaks during an Economic Club of New York in 2018.
Mark Kauzlarich—Bloomberg/Getty Images

Signs of fading inflation and a few strong jobs reports aren’t enough for Larry Summers to sleep well at night. The contrarian economist and former Treasury Secretary is worried that consumers are running out of cash, businesses are cutting costs, and “geopolitical uncertainty” is on the rise. Combined, he warns that these “very large” risks could spark a cartoonish economic crash.

“I think the economy is vulnerable to a Wile E. Coyote moment where these things all come together and it’s like walking off a ledge sometime in the middle or latter part of this year,” Summers told Boston’s NPR news station WBUR Wednesday, referencing the classic Looney Tunes character known for his not-so-successful attempts at catching the Road Runner. “I’m not predicting with confidence that that will happen, but I think the risks are significantly elevated.”

The U.S. economy added 517,000 jobs in January, pushing the unemployment rate to a 53-year low of 3.4%. And year-over-year inflation, as measured by the consumer price index, dropped from its 9.1% June peak to 6.5% in December. 

Federal Reserve Chair Jerome Powell said last week that the latest data is indicative of “disinflation” in some key segments of the economy. But Summers, who over the past few years stood firmly against the Federal Reserve’s “transitory” argument—that inflation was a temporary issue caused mainly by broken supply-chains amid COVID-related lockdowns—said that getting inflation all the way back to the Fed’s 2% target remains a challenge.

“It’s going to be a very difficult balancing act,” he argued. “I think the economy is going to slow and inflation is going to come down…but I still think the risks are very large that we either don’t get inflation down durably or the economy tips into recession.”

The economist also used one of his favorite analogies to describe his fears of entrenched inflation, comparing the Fed’s interest rate hikes to a form of antibiotics for the economy, where the full prescription must be taken for the effects to last.

“We’ve all had the experience of taking a course of drugs and giving up, stopping the drugs, before the course was exhausted, simply because we felt better. And then, whatever infection we had came back and it was harder to fight the second time,” he said.

Summers admitted that the economy has been “stronger” than he forecasted, but argued that a recession is still likely coming within the next 18 months. That recession could begin with an outright crash—a “Wile E. Coyote” moment of sorts—due to a few key factors, according to the economist. 

First, consumers are spending down the savings that they built up during the pandemic and using credit card debt to cope with the rising cost of living. Eventually, that could lead to a point where many Americans’ wallets are tapped out, and overall consumer spending falls. 

Second, Summers worries about rising “geopolitical uncertainty” amid tensions between the U.S. and China. And third, he said that businesses might decide to pause business development or expansion plans until there is more certainty regarding the future for the economy, and that could slow gross domestic product (GDP) growth.

But like other economists—including Mohamed El-Erian, president of Queens’ College at the University of Cambridge—Summers warns that making predictions about the economy, and particularly the path of inflation, is more difficult than ever before. 

“The economy right now is as hard to read as any time that I can remember in the 40 years I’ve been following it,” he said. “On the one hand, the economy is very strong….the hard thing to judge is if inflation is on a strong enough downward trajectory to get to the 2% target. And if inflation comes down, will it stay down?”

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