What FedEx’s slump shows us about the threat of recession

Hand-wringing over an impending recession is loud. The latest warning was sounded by the CEO of FedEx, Raj Subramaniam, who said Sept. 15 that the company’s package deliveries were slumping across the globe. He believes this signals that a global recession is at hand, and that the downturn would soon engulf our economy.

Whether Subramaniam turns out to be correct, which we will come back to, the concern highlights an important point. Namely, that the economic problems we have here at home are evident across the globe. Inflation is painfully high, central banks are aggressively raising interest rates in response, and as such, recession risks are uncomfortably high — everywhere.

Indeed, the entire global economy is grappling with the same massive shocks: the COVID-19 pandemic and the Russian invasion of Ukraine. Either shock by itself would have done serious damage to the economy, but together these shocks have been devastating.

While the pandemic appears to be winding down here at home, it is still wreaking havoc on China.

China is the world’s second largest economy, after ours, and it is where many of the world’s supply chains originate. Although stresses on these chains are easing and shortages of everything from vehicles to appliances are abating, the chains remain fragile. China is still holding to its no-COVID policy, which means the government locks down big parts of the economy, along with the supply chains, when even a single case of the virus is identified.

Fallout from the pandemic is also exacerbating severe worker shortages across the globe, adding to the wage and price pressures.

Parents with young children still have difficulty finding child care so they can go back to work, as so many child-care facilities closed in the pandemic. Retirees, many of whom typically come back to work, at least a bit, aren’t doing so, probably because they worry about catching the virus. And many suffer from long-term COVID symptoms, which make it tough to do any work at all.

The Russian invasion of Ukraine and the sanctions the United States and other Western nations have slapped on Russia have caused prices to spike for oil, food, metals, and other industrial materials that Russia produces.

This has juiced up inflation everywhere, but especially in Europe, which is highly dependent on Russia for its energy supplies. Much of Europe faces shortages and skyrocketing prices for natural gas that will heat homes and power factories this winter.

Russia and Ukraine are also critical to the world’s food supply. Lots of wheat, corn, sunflower oil, and fertilizer, which is important for growing crops everywhere, typically come from these countries. These foodstuffs are vitally important for emerging economies throughout Africa, the Middle East, and Asia, where food can account for as much as half of a family’s budget.

Russia’s aggression and the resulting spike in oil prices also caused long-dormant inflation expectations to come unanchored across the globe, unnerving central banks. That’s because if workers believe that inflation will remain high, they will demand bigger wage increases from their employers to compensate, and employers will oblige as they believe they can pass along their higher costs in the form of higher prices for customers. A vicious self-reinforcing cycle of higher wages and prices takes hold. The high inflation becomes entrenched.

Central banks are desperate to avoid this, and they are universally jacking up interest rates to slow their economies to get inflation expectations and inflation back down. They hope to raise rates high enough and fast enough to quell inflation, but not too high and too fast that it pushes their economies into recession. This will be difficult to pull off, and it’s why a global recession is such a threat.

This brings us back to the FedEx CEO’s global recession call. To be sure, the warning should be taken with a bit of salt, as FedEx is in a highly competitive industry and it may be losing out to the competition. Moreover, as the pandemic has wound down, consumers are no longer sheltering in place when they had no option but to spend their money on things that are packaged and shipped. Now that the virus has faded, they are spending on travel, restaurants, ball games and the like.

These caveats aside, the global economy is on the precipice of recession, and it wouldn’t be surprising if China, Europe, and some emerging economies suffered a downturn in coming months. We still have a fighting chance of avoiding one given the stronger financial position of most American families and businesses, but it will be tough going. Not because of something we should have done or not, but because of events out of our control. Sometimes stuff happens.