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The Fed began raising interest rates one year ago, on March 17, 2022, and the U.S. economy is not in recession. This “Godot Recession” (because we’re just waiting and waiting and it never comes, in the words of Ray Faris) should not be surprising. There never was good reason to expect a recession so quickly, though there is good reason to expect one to begin late in 2023 or early 2024. That conclusion derives from the usual business cycle pattern, adjusted for some special aspects of this episode.

The average time lag between changes in monetary policy and the real side of the economy—spending, production, and employment—is about one year. The time lag for changes in inflation is roughly two years. This description simplifies a more complicated process and ignores the substantial variability of the time lags. Milton Friedman famously found that the time lags are long and variable. Still, the average is a good starting point.

In the typical business cycle, the Federal Reserve (or the central bank of another country) raises interest rates, impacting interest-sensitive parts of the economy: construction, big-ticket consumer expenditures, and business capital spending. Car sales and single-family home construction decline very quickly. Other constructions and most business capital spending decline more gradually, because of the longer time needed for planning projects.

Layoffs in these interest-sensitive sectors of the economy lead to households needing to cut their spending. Producers of discretionary consumer goods and services see lower sales. This would involve furniture, clothing, vacations, and so forth. Layoffs in these parts of the economy further aggravate the spending reduction, leading to even more layoffs.

The economy does not sink to anything because some activities are quite stable, including federal government employment, health care, and utilities. People with secure income—either because their jobs are secure or their retirement pensions are safe—see bargains. Businesses discount products to win more sales, so the depths of the recession are a good time to buy, for those who have the money.

Also in the depths of recession interest rates fall. First, demand for loans drops because of reduced spending. And second, people nervous about the possibility of layoffs save more of their income, leaving it in the bank. Banks cut their interest rates. At some point, the Fed relents on tightening and cuts interest rates.

The interest-sensitive parts of the economy, which were the first to decline, are now the first to recover. Housing construction rebounds, as do car sales. A little later non-residential construction and business capital spending picks up. Increased employment in these industries drives more consumer spending, which gets even more people working. And the economy has recovered.

That’s the usual pattern, explaining the long time lags. Coming out of the pandemic, though, a few things are different. They won’t prevent a recession, but they will delay its onset.

First, new car sales won’t drop so quickly. Supply chain problems reduced production, so we have pent-up demand for new cars. In the supply-constrained market, manufacturers and dealers could drive hard bargains. Car prices are about 15 percent higher than they would otherwise have been, so car makers and dealers have plenty of room to offer good deals to get the cars sold. That will be one small factor delaying the onset of the recession.

Business capital spending will also be slow to adjust to the higher interest rates. Most of the time equipment purchases are about replacing aged gear or adding capacity. However, our tight labor market led many companies to order computers, equipment, and machinery to substitute for the workers they have been unable to hire. This will delay the response to higher interest rates.

When layoffs occurred in recent months, many people simply walked across the street to another company that was still short of workers. For quite some time we have been in the unusual situation of having more open positions across the economy than unemployed people. This delaying factor does not apply to people whose skills are highly specialized in one sector but applies to many people. So the tight labor market is the third reason that the effect of monetary policy will be delayed this cycle.

Finally, the usual business cycle involves laying off people and cutting back their spending. The difference this time is that most of the stimulus checks that went out in 2020 and 2021 were saved. Household bank accounts soared. In the past year, Americans in the aggregate have been spending down their past excess savings. But at the rate we’ve been going, people can keep this up through the spring of 2024. In actuality, the rate at which we draw down our savings will probably accelerate as more layoffs occur, but the cutback in consumer spending will certainly be delayed from the usual time lag.

In short, there is no reason to be surprised by a long time lag. And let’s not forget that the Fed’s first interest rate hike back on March 17, 2022, was just one-quarter of a percent. Since then they have pushed short-term interest rates up over four more percentage points, but the early moves were gradual. So the best timeline for the usual lag would not be March 2022 but sometime in the autumn of 2022.

The factors delaying recession will not prevent it, and it’s dangerous to think that because it is not here yet, it’s never coming.

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