Recessionary Signals Echo History

Food prices were rising at a record rate and rents were being increased to levels that “strained family budgets.” Wages were increasing, but not as fast as prices. Gasoline inventories declined and prices surged by 25%. One historian wrote that demand for consumer goods was high, but store shelves and auto showrooms were empty. In response, the White House proposed a series of measures to address the problem. A divided Congress refused to act. The story sounds very familiar — however, few people alive now have any memory because these events occurred in 1947. Then, a sharp recession followed, and it had a big impact on oil. The same will happen now.

I was three years old at the time. I do not remember being told of President Harry S. Truman’s efforts to curb inflation. I would not have understood had my parents tried to explain the issue. I doubt they heard President Harry Truman say: “Today, inflation stands as an ominous threat to the prosperity we have achieved. We can no longer treat inflation — with spiraling prices and living costs — as some vague condition we may encounter in the future. We already have an alarming degree of inflation. And even more alarming, it is getting worse.”

Truman was specific: “Since the middle of 1946, fuel has gone up 13%; clothing prices have gone up 19%; retail food prices have gone up 40%. The average of all cost of living items has risen 23%.”

Truman offered a number of measures to address the problem cautioning at the end of his remarks: “If we neglect our economic ills at home, if we fail to halt the march of inflation, we may bring on a depression from which our economic system, as we know it, might not recover. And if we turn our backs on nations still struggling to recover from the agony of war, not yet able to stand on their own feet, we may lose for all time the chance to obtain a world of free peoples that can live in enduring peace.”

Among the measures Truman sought was the authority to control prices of wages, rents, and goods where increases were extreme. Truman called for banks to limit the extension of credit to consumers, explaining that “at a time when the economy is already producing at capacity, a further expansion of credit simply gives more dollars to use in bidding up the prices of goods.” A Congress later labeled “do nothing” by Truman refused to act.

Similarities Today

The situation today is amazingly similar. Consumer savings in the US, Europe and Asia are high because opportunities to spend have been limited by Covid-19 lockdowns and travel restrictions. Consumer goods are in high demand today, but store shelves are empty in many countries because supply chains have been disrupted. Auto showrooms are bare as they were in 1947 because carmakers have been unable to obtain the critical parts required to expand production.

Prices of oil products have spiraled higher in 2022 just as in 1946-47, because refiners have been unable to increase the supply of gasoline and diesel fuel to meet the growing demand. US refining capacity was strained in 1946-47 because additions had been limited during the last years of the war. Capacity today is strained because a number of refineries were closed in the US and other countries during the Covid-19 pandemic.

In 1947, the US and the world faced serious current and prospective shortages of key goods. Today the situation is similar. Truman took note of the issue in his 1947 speech, remarking: “No one can foretell exactly how serious some shortages may become next year. With serious shortages, a free market works cruel hardships on countless families and puts an unbearable pressure on prices.”

The predicament of the world in 2022 is no different. Russia’s attack on Ukraine has cut the supply of grains that normally feed much of the world’s poor. The sanctions imposed on Russian banks make it impossible for many third-world countries to purchase grains from Russia while supplies in Ukraine cannot reach market due to the blockade of Ukrainian ports. Starvation threatens millions, if not billons.

Credit Tightening

Price controls have not yet been introduced in 2022, just as in 1947, when Truman’s request was denied. However, credit is being tightened. The process began in New Zealand, a small country that has led the world in tightening for years. The key rate in the country is now 2%, well above the 0.25% rate set by the European Central Bank (ECB). Rates are set to increase in almost all nations for the rest of the year.

Increased interest rates are not, however, the only means by which central banks will suppress economic activity. Sales of bonds and mortgages purchases by central banks under the phrase “quantitative easing“ may well have more significant impacts, particularly on emerging market economies. For example, the US Federal Reserve purchased $5 trillion in bonds and mortgages during the Covid-19 pandemic to support the economy. More than $1 trillion worth will be sold over the next year. The ECB may soon follow the Federal Reserve. Inflation in Europe rose to 8.1% in May, the highest annual rate since the euro was created in 1999.

Monetary tightening will depress rates of growth in the US and the EU. Emerging market economies will see even greater impacts. Again, history will not repeat but, as Mark Twain wrote, “will rhyme.”

Impact on Oil

In the sharp recession the US suffered from November 1948 to October 1949, real GDP declined by 2%. Growth in consumption of gasoline and distillate fuel oil also came to a stop. Not surprisingly, this had a worldwide impact, given the importance of the nation at that point in history. Growth in global oil production, which had been expanding following the end of the war, also came to a full stop in 1949.

Similar impacts should be expected in 2023 and 2024 should the global economy slide into serious recession, as now seems likely. The impacts of Russia’s war, combined with monetary tightening in the US, Europe and other countries, will lead to a one- to three-year economic recession. Oil producers and oil companies will not be exempt.

Philip Verleger is an economist who has written about energy markets for over 40 years. A graduate of MIT, he has served two presidents, taught at Yale and helped develop energy commodity markets since 1980. Kim Pederson is editorial director of PKVerleger LLC. The views expressed in this article are those of the author.