If you think today’s economy feels like the world’s wonkiest roller coaster, you’re not alone.

Companies eyeing record gains one minute are seemingly laying off employees the very next. The U.S. stock market, after facing a major sell-off a mere two weeks ago, has had its three major indexes just notch their largest weekly gains of the year. I mean, are we headed toward a recession or aren’t we?

Amid this volatility, it can be helpful to step back and take stock. That might allow us to better understand where we are and possibly encounter some useful lessons to carry forward.

This week, I’ll highlight several talking points by Kellogg finance professor Sergio Rebelo who assessed global trends in a recent webinar.

A volatile economy

The first trend on Rebelo’s mind is the easing of inflation.

“High inflation is increasingly in the rearview mirror,” Rebelo says.

So far, inflation has declined without driving the economy into a full-blown recession despite large increases in interest rates. Rebelo notes that the economy has been resilient in part because most households hold fixed-rate mortgages, which shielded them from interest-rate hikes. The cost of servicing household debt as a percent of disposable personal income remains around 10 percent in 2024, similar to pre-pandemic levels.

With inflation on the decline, the European Central Bank, China’s central bank, and the Bank of England, among others, have begun to cut interest rates. There’s growing anticipation that the Fed will follow suit and lower interest rates in September. This sentiment is being reflected in the bond market; the yield on the ten-year treasury bond has significantly declined.

Still, despite slowing inflation, prices are much higher now, and they are not likely to drop. “People are feeling that goods and services have become permanently more expensive, which is why inflation is so unpopular,” Rebelo says.

The march toward de-globalization

Historically, world trade has driven down prices, improving efficiency by offering companies larger markets but also more competition. The recent escalation of trade wars between countries like the U.S. and China, however, is poised to harm global productivity, according to Rebelo.

The conflicts in Ukraine and Gaza have further disrupted global trade, affecting transportation and driving up the costs of fertilizers and other raw materials.

“There’s been a significant shift toward de-globalization,” Rebelo says. “A lot of companies feel less comfortable investing overseas.” For example, direct foreign investment into China has decreased this year for the first time.

The recent trend toward import substitution and industrial policies that subsidize local companies could result in higher prices due to decreased scale and lessened competition.

“Economists are worried that the gains from trade are being eroded,” Rebelo says.

Rebelo underscores several other trends in the economy: a potential labor revolution in light of a changing work environment and AI; a tight job market; and a tipping point for climate change that’s affecting the way companies operate.

Read the full coverage in Kellogg Insight.

Abraham Kim, senior research editor
Kellogg Insight