Unlocked: Should We Worry About a Recession? (Maybe, But Entertainment is Still in a Bad Place!)
A Bonus “Most Important Story” for 14-Nov
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Are we in a recession yet?
I ask, because a lots of people want to believe we are.
Countless eporters, pundits and analysts have been predicting or warning about a recession since the middle of 2022. Heck, here’s a link to someone predicting or warning about a recession every month this year. (These examples weren’t hard to find.) Even weirder, a smaller subset on Twitter (especially Silicon Valley folks) think we’re already in a recession...but said recession stubbornly refuses to materialize.
In addition to that great news, here’s even more, courtesy of Noahpinion:
“The unemployment rate continues to hover near record lows at 3.8%, while the prime-age employment rate is near record highs at almost 81%. Inflation has come way down and is now around 3.7%, with core inflation a bit lower, and median wage growth is outpacing inflation. Meanwhile, new survey data shows that Americans have gotten wealthier, and wealth inequality has narrowed.”
That said, even though so much of the US economy is doing wonderfully, way too many people are still crazy pessimistic. Remember last summer, when we were in a “vibes-cession”? Well, it appears like we’re still in it. (Unlike real recessions, which last two or so quarters, “vibes-cessions” can last up to a year or longer.) Indeed, most of the pundits/commentators (especially political commentators) warning of economic discontent can’t point to actual data, so they focus on consumer sentiment that the economy is bad:
Now, at this point, about half of you might be experiencing déjà vu. You see, I wrote about this exact subject last November. And when I was researching the economy for last week’s “Most Important Story of the Week”, I re-read that article on predictions, Hollywood and recessions, and it was so similar to what I had to say today, I’m doing something I’ve never done before:
I’m “unlocking” a paid subscriber post.
Many other Substackers (is this a word?) I follow often unlock old articles, but I haven’t done it before, mainly because I include a lot of data in my articles, and I really want most of that valuable info to “belong” (for lack of a better word) to my paid subscribers, because I can’t really do this work (really, me and my team can’t do this work) without the paid subscribers. (If you have strong feelings either way about me unlocking articles, please send me feedback.)
But this article doesn’t include bespoke data cuts and it’s a year old, so I feel fine unlocking it. I don’t think there’s any better way to illustrate the fact that people have been losing their minds over a coming recession (that still hasn’t hit the economy) than by re-running this article. Literally, almost nothing I wrote last year has changed! Heck, I even found an old article from me about how, in 2019, everyone was predicting a coming recession!)
So here’s that article, plus I’ll have some more thoughts/updates at the end.
Should We Worry About a Recession? (Maybe, But Entertainment is Still in a Bad Place!)
The Most Important Story of the Week for 29-November-2022
Here’s some things that analysts, pundits, politicians, economists and journalists have predicted over the last couple of years:
At the start of Covid-19 pandemic, car manufacturers knew/predicted that a recession was coming and cut back on orders for parts, anticipating lower car sales.
Last summer, everyone assumed/predicted that we were already in a recession.
Countless political pundits told us/predicted that Democrats would get wiped out in a red wave because of inflation and the economy.
After Elon Musk took over Twitter, many articles explained/predicted how Twitter would crash within days.
Quite a few analysts and economists worried/predicted that holiday spending and travel would be down, because consumers were worried about inflation and a coming recession.
Yeah, none of these predictions came true, despite countless headlines on countless major news websites, which brings me to the theme of today’s “Most Important Story of the Week” column:
Predicting the future is really hard!
Today, I’m diving deep into the economy. Are we in a recession, as nearly every headline says? What about inflation? And advertising? As should shock no one by now, I have a pretty nuanced take on all of this. And it all relates to how hard it is to predict the future.
Most Important Story of the Week - Should We Worry About a Recession?
I really enjoy the classic explanation for why recessions start, as I was taught in school.
Imagine you have a farmer named MacDonald. Each year, Old MacDonald raises a bunch of cows. (They say “moo”, by the way.) He sells these cows and buys one replacement tool, say a shovel or a hammer or something from Shopkeeper Sam. But say this year MacDonald is worried, for whatever reason, that his cows won’t sell for very much at the market. As a result, this year, he chooses not to buy a replacement shovel.
This starts a cascade of impacts. Sam employs Assistant Adam as his sales associate. With the loss in sales, Sam can’t afford to keep Adam on payroll, so he has to lay him off. Since Adam got fired, he can’t afford to replace his old roof as he planned. Then Roofer Ralph loses a sale, so he doesn’t buy a new car from Car Salesman Carl. And so on and so on. Add it up, and if enough folks pull back on economic activity, boom, you have a recession. Literally, all it takes is enough folks to simply spend 1% less than they did the year prior and you have a recession.
Note, a lot of the assumptions depend on the psychology of the markets and business world. If enough folks think or worry a recession will happen, then that worrying by itself, creates the recession folks worried about in the first place. And this year we’ve been worrying about this:
Clearly, folks are worried about a recession. But is that the chicken or the egg? Were folks worried about a recession, so media outlets wrote about it…or do media outlets worry about recession and then pass that on to their readers?
Plus, thanks to social media, everything is turned up to 11. We’re not just overly confident we’re in a recession, but convinced it will be an apocalyptically bad recession. Because every thing nowadays is either the “best ever” or the “worst ever”, with no middle ground.
Today, I won't predict whether we are in a recession, or will be in one soon. That alone is a fairly shocking non-prediction! Everyone is predicting that we are already in a recession. (Or worrying so much about a recession it may as well be a prediction.) Since we’re very bad at predicting recessions, I’m just going to run through the evidence and (very tentatively) the potential impacts on the entertainment industry.
(Caveat: I’m not an economist, but business leaders sort of have to have takes on the economic environment. But we should acknowledge how difficult this is. Stay humble!)
Predictions Are Tough (Especially in Economics)
Don’t trust me on this one, just ask Nate Silver. Here’s a quote from The Signal and the Noise (from chapter 6):
“Instead, economic forecasts are blunt instruments at best, rarely being able to anticipate economic turning points more than a few months in advance. Fairly often, in fact, these forecasts have failed to “predict” recessions even once they were already under way: a majority of economists did not think we were in one when the three most recent recessions, in 1990, 2001 and 2007 were later determined to have begun.”
Nate Silver’s entire chapter reveals just how hard it is for economists to actually forecast economic growth or decline.
Indeed, earlier this year, we just saw this in action, as I mentioned in the introduction. A lot of economists, analysts and pundits were worried that we were already in a recession. There were tons of headlines on it. Tons of social media retweets. Tons of talking head pieces of cable news. NPR’s Planet Money had a podcast on it, basically asking why we hadn’t declared a recession already.
Then Q3 came along and the economy actually grew!
Here’s Kevin Drum’s chart on it:
Economists don’t have a great track record at predicting economic activity. And if economists can’t do it well, then journalists probably can’t do it much better either. That goes for talking heads on cable news as well.
And I’d extend this to business leaders. And I have a real world example of this, too, as I mentioned in the introduction. At the start of Covid-19, all of the carmakers knew what was coming: a decline in automobile sales. This was an economic forecast, and as such, nearly all car manufacturers lowered orders for supplies, especially including semiconductor microchips.
Were they right?
No!
Instead, all the lack of spending meant consumers had a lot of cash and wanted to buy cars. As such, car prices went through the roof. If one carmaker had bucked the trend and taken their excess cash and doubled, or tripled their car production and semiconductor orders, they’d have cleaned up. Instead of having no inventory, they’d be outselling their competition as car prices went through the roof.
But car companies all pulled back at the same time, anticipating a collapse in car prices, but the opposite happened. And yes, maybe the car companies were secretly happy at the boom in prices (and hence profits) but the point is they got it wrong. Predicting the future is tough!
When we start talking about a recession, we should start with this humility, that we really have a tough time making economic forecasts. But two things make the current climate slightly different, starting with inflation.
Inflation: How Worried Should We Be?
The biggest economic story of 2022 is the giant leap in inflation. A lot of folks want to pretend like they saw a huge increase in inflation coming, and a lot of folks cite Harvard economist and former Treasury Secretary Larry Summers as a person who “called it” on inflation.
But most folks missed it, partly because there had been many previous predictions of impending inflation doom that never came true, from some of the most respected economists in the world, mind you, like the team at the Federal Reserve! The “Boy Who Cried Inflation” if you will. Again, economists are fairly inaccurate in forecasting, so many people were skeptical that this time their predictions about inflation would come true.
Now that inflation is officially happening, we still have predictions to make. And heaping doses of uncertainty.
For example, how long will inflation last? Because if it’s already begun to abate, then the Federal Reserve shouldn’t keep raising rates so aggressively. For my money, I love Kevin Drum’s charts of month-over-month growth of inflation, and they really look like inflation has already been tamed:
(He has other good takes here or here.)
I mean, if Kevin Drum’s analysis is right—and he’s just one person—then inflation peaked in January, and has been trending down ever since. The problem had been solved! But the Federal Reserve kept raising rates at their last meeting, meaning they think inflation will keep rising. (Some members of the Fed board now want to slow future interest rate hikes, but even this may be too slow.)
Unfortunately, the main cure to inflation is causing a recession, a process that’s already begun.
If We’re In a Recession, It’s (So Far) A Mild One
To combat inflation, the Federal Reserve Bank of the United States raised interest rates aggressively all year. Historically, high interest rates tamp down business investment, which decreases economic activity, which stops inflation. But “decreasing economic activity” is code for “cause a recession”.
Note that the Fed isn’t trying to cause a recession. They’re trying to both tamp down inflation by lowering consumer demand without causing economic contraction, called a “soft landing”. The trouble is soft landings are rare in the economic history. Usually, rate hikes lead to recessions.
Recessions are bad for lots of reasons, but the main one is they spread human misery. Remember that: A recession means that people suffer. Never forget the human cost.
The only good news is that, so far, these measures haven’t yet had a large impact on the economy. If we’re in a recession, we’re not in it yet. Start with the best news: unemployment!
Specifically, people lose their jobs, then they lose their shelter and food, and then they suffer. That’s why we don’t want recessions! So far unemployment hasn’t increased.
The other reason I’m still optimistic that, if we are in a recession, it will be a light one, is that we just had great holiday sales numbers. Now all year-over-year comparisons need to be adjusted for the boost in inflation, but initial numbers say that retail had a great Black Friday/Cyber Monday. More folks were in stores for Black Friday than ever before. One estimate had it up 2%, but Mastercard has it up 12% year-over-year, not counting for inflation! That’s a great sign a recession hasn’t happened yet.
In general, inflation really hasn’t stopped consumer spending, as spending overall is flat but way up in certain categories. Despite constant price increases, spending and attendance at theme parks and concerts is up. Vacation spending is up too. Clearly, pent up demand for live events is still being unleashed. And for what it is worth—as a reminder economists aren’t good at this—the World Bank just forecast economic growth across the world in 2023.
But, but, but…
There Are Some Worrying Signs for Both the Entertainment and Tech Sectors
It’s not all good news for the economy.
Let’s start with advertising: yes, we are in an “advertising recession”, even though there is no official government body to declare one. From Evan Shapiro’s blog:
Axios has more grim news on 2023 advertising forecasts:
Yeah, that’s pretty stark. Marketing spending is fairly discretionary, meaning it's one of the first line items to go when a recession hits. To continue the analogy from the introduction, cutting back on marketing spend is the equivalent of Old MacDonald not buying his shovel.
As a result, we’re seeing suffering for everyone who depends on advertising, which means Big Tech platforms (like Google and Facebook) and entertainment (everyone basically). They all had poor earnings reports in Q3, in some cases because everyone is predicting poor end of year performance.
This resulted in job losses across entertainment and social platforms. Here’s a run down by Axios:
And this is the analogy continued! With a lot of laid off workers, and higher interest rates discouraging new companies to form, you have a recipe for a recession. And that’s the key question now, whether or not the advertising recession acts as a larger contagion across the economy.
And I won’t predict what happens either way. The advertising and layoff data are bad, but the rest of the economy so far has seen very positive numbers. I can’t predict either way.
Entertainment’s Biggest Problems Existed Before The Recession Worries
Now, if you work in the entertainment industry, should you worry about the future?
Yes!
But not because of the economy, but because of industry-wide choices. The biggest issue for entertainment is that three of their major revenue streams look severely impacted going forward: theatrical releases, transactional-video-on-demand (think pay per view or renting/buying on iTunes/Amazon) and linear TV. Theatrical revenue hasn’t recovered from the pandemic—and Thanksgiving weekend didn’t help—and linear TV is under pressure from cord cutting.
Meanwhile, the replacement for those three revenue streams—subscription video-on-demand/streaming—doesn’t make as much money or have the growth rates that most investors and business leaders assumed as of 2019. (Not to toot my own horn, but I tried to warn about this back then…)
That’s why nearly all the streamers are losing money and even the most profitable pure streamer (Netflix) still only makes chump change compared to historic cable revenues. Those factors would have hurt all of entertainment’s valuations regardless of a possible recession. It’s just that 2022 is the year where slowing growth and growing financial losses became obvious to Wall Street, starting with Netflix and continuing to traditional entertainment.
In this context, the advertising recession is simply a double-whammy entertainment didn’t need. At all. It makes the current disruption that much worse. But even if the economy were booming, the transition in business models would have caused pain (and maybe lay offs) either way. Growth would have slowed at some point.
End of the Day? We May Be In a Recession…
If you take nothing else away from this article, just be more skeptical of every economic headline you read. I stumbled on this quote recently and just whoo-boy:
“GEOFFREY CROWTHER, editor of The Economist from 1938 to 1956, used to advise young journalists to “simplify, then exaggerate”.
That describes economic journalism in a nutshell!
The more confident the headline forecasting a recession, the less trust to put in it. If you’re a business leader wondering, “Well, who do I trust then?” I mean, yeah, the experts. But listen to the experts who don’t write viral headlines (like news outlets) and focus on the experts who emphasize the probabilities.
If I had one last piece of advice, it’s to be flexible. If the entire industry is wrong about a possible recession, then the firm who realizes it first can stand to profit the most. When the herd is headed one way (off a cliff?) the lone outliers stand to benefit. (Again, look at the car analogy.)
And even if a recession is imminent, I have the same advice as always: focus on your strategy. Worry less about Wall Street, worry less about the economy, and develop a competitive strategy that focuses on your strengths. Strategy is focus and good strategy always wins.
Some Additional (2023) Thoughts:
Rereading that piece, I have some more thoughts, from the present/2023:
I’d double down on the end of this article, that the entertainment sector may be/probably is retracting, and thus Los Angeles could be in a regional recession, especially after six months of work stoppages. If I thought Hollywood had tough times ahead in Nov-2022, well, not much got better in 2023! This especially applies to movie theaters and a contraction in TV and film production (which, ironically, could lead to more profitable media companies.)
But heck, even I could be wrong about this! No one can predict the future. Would you be surprised, in the short term, if TV and film production go way, way up, to make up for lost time? These things are complicated. And hard to predict. America could enter a recession in early 2024 while Hollywood is the busiest it’s been in eight months.
A few weeks ago, I shared an Astral Codex Ten article on what types of predictions are evergreen (think Nostradamus) and which get regularly mocked (think Fukuyama and The End of History)1, and this is a great example of that phenomenon. People who have been predicting a recession for the last two years will take credit when a recession finally and inevitably arrives. (And they’ll just cite some other piece of bad economic news in the meantime.) Meanwhile, predicting “the economy will keep doing well” just doesn’t drive that much street cred, and at some point you’ll be wrong.
On predictions, trust people who make predictions with probabilities and hold themselves accountable. In this case, imagine if everyone last year said, “I think there’s an 95% chance of a recession in the next year.” then this year, said, “Oh, well, I got it wrong last year, but I still think there’s a 95% chance of a recession in the next year.” You’d be more skeptical naturally.
Let me share four reasons why I think negativity about the economy has increased and folks have thus incorrectly forecast recessions. First, the sample size for “recessions” is tiny. Sure, the inverted yield curve and the Fed raising rates usually indicate a coming recession. But also, there aren’t that many recessions since 1960 (eight) and it’s way too easy to overfit the data.
Second, I just don’t trust consumer sentiment as an economic indicator anymore. Political partisanship drives consumer sentiment since around the year 2000, as opposed to actual opinions on the economy. Kevin Drum provides the evidence:
When did Republicans start thinking the economy was horrible? Oh, right around the time that Joe Biden got elected. Thus, consumer sentiment isn’t actually a barometer of economic opinion, but a gauge of political partisanship.
Third, to borrow an idea/point from James Fallows, the “mainstream media” often frames economic news as a negative, even if it’s positive news! Take this recent Politico headline as an excellent example of this:
Fourth, there’s on other culprit: social media. Social media amplifies bad news. And thus, many people, especially thought leaders like reporters and opinion columnists, who spend virtually all day online, ingest mostly bad news. And that makes everyone think the economy is constantly horrible, even if it isn’t.
Ironically, I half expect that after I publish this, in two quarters we’ll be in a recession and folks will say, “See the gloom and doom was right!”
Ironically, almost no one cares about the event that “debunked” Fukuyama—9/11 and Islamic terrorism—anymore, sort of proving his point.