The U.S. economy shrugged off the tech bust

Maybe "sectoral recessions" aren't as dangerous as people thought.

In this week’s roundup, one of the items is about how some people think the U.S. is in a recession, when we’re actually in a boom. As for the proof that we’re in a boom, I’ll just quote myself a bit:

The U.S. economy is doing GREAT right now. Real U.S. GDP growth came in at a 4.9% annual rate in the third quarter, which is as fast as China’s official growth rate, and is unusually fast for the U.S. 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.

But I noticed an interesting tweet while I was writing that section:

That’s not happening either, of course; most American industries are doing just fine. But it’s easy to guess why Jason thinks there’s a “rolling recession” — much of the tech industry, especially the venture-funded startup industry, has taken a beating since the end of 2021. It’s easy and natural to extrapolate the performance of our own little corner of the economy to the whole thing.

But in fact, it’s worth asking why the tech bust didn’t drag the U.S. economy into a general recession. In fact, there are plenty of macroeconomic models of how shocks in individual industries or even individual companies propagate throughout the economy and send the whole thing over a cliff. Horvath (2000) and Acemoglu et al. (2012) are two examples. The basic idea is not too hard to grasp — industries and companies trade with each other, so when one goes down, it buys fewer intermediate goods from the others, and so on.

Now, the caveat here is that there are macro models for basically any idea you can possibly come up with, and they’re all very hard to test empirically — for example, you can find evidence that sectoral shocks are very important, and evidence that they’re not important at all, and which result you decide to believe basically depends on which set of assumptions you like better. But it’s pretty widely accepted that the Great Recession of 2008 was prompted by the implosion of the finance industry, and most people think the bursting of the dotcom bubble had something to do with the mild recession of 2001. So it’s worth asking why the tech bust of 2022-23 didn’t have similarly negative results.

Anyway, first let’s review some of the details of how that bust happened.

How the tech bust of 2022-23 went down

The excitement around generative AI has been so intense that it’s hard for people outside the tech industry to even realize that much of the software industry is still reeling from a major shakeout. But people in the industry know. AI is great, but consumer internet, SaaS, fintech, crypto, etc. all took a beating.

The whole thing started in November 2021, when two things happened. First, investors realized that interest rates were going to go up by a lot. In general, rate hikes are bad for stock prices, because they make it harder for companies to borrow money, and because they increase the “discount rate” that investors use to value future cash flows. If you start to expect interest rates to be higher, you should generally expect stock prices to be lower than they otherwise would have been. And when we look at the data on forward interest rates (which are closely related to interest rate expectations), we see that they started to rise in November 2021, a few months before the Fed actually started hiking.