A Little Economics Goes a Long Way

According to pollsters, the economy is the number one issue on the minds of voters.  So perhaps it is time for a little economic information, as opposed to dubious claims and outright misinformation.

Question: Are we in a recession?  Answer: No. According to the National Bureau for Economic Research, the official agency charged with measuring recessions, “The official metrics used to determine a recession include negative gross domestic product (GDP), increased unemployment, a decline in retail sales, a slowdown in manufacturing, and diminishing income. When a nation’s economy begins to experience these events simultaneously over an extended period of time, there’s a good chance it’s in a recession.”

GDP grew at a 2.5% rate in the third quarter, and the unemployment rate remains at a historic low at only 3.5%.  Competition for workers has led to increases in wages, which don’t fully offset the inflation. Inflation is a result of not only worker shortages but also lingering supply change problems, a spike in post-pandemic consumer demand, lingering housing shortages, and the effect of the war in Ukraine on worldwide inflation (especially food and fuel).  Gas prices have settled down somewhat, about30 cents a gallon above a year ago.  But housing, good and energy continue to drive rising prices.  A typical recession has high unemployment, falling output, and low inflation.  Those conditions are the opposite of what we are seeing now.

Question. Is a recession coming?  Probably not immediately.  A lot of people look at the Index of Leading indicators as a forecast tool. The Conference Board Leading Economic Index® (LEI) is the most widely used predictor of recessions, with about a six-month lead over changes in GDP and unemployment. This index is a composite of a number of measures that turn up before the business cycle turns up and turn down before the economy begins to decline. Building permits, manufacturers’ inventories, and the stock market are included in these indicators.   In the US, the LEI index rose by 0.9 percent in October), following a 0.1 percent increase in September and a 0.7 percent increase in August.

Question: What about interest rates?  The Federal Reserve Board affects interest rates through its control over the Federal Funds rate, which is the rate at which banks can borrow from the Fed.  A series of increases in that rate by this independent board has affected mortgage rates, auto loan rates, and other key interest rates that affect household and industry borrowing and even borrowing by the federal and state governments. These rate hikes are intended to tamp down borrowing but there is always afear of overshooting and dampening economic activity.

The Fed ‘s board is appointed by presidents with seven-year terms and confirmed by Congress, so they are largely independent of the current president.  While some fiscal policy—changes in tax rates and spending programs—is under the joint control of Congress and the executive branch, the influence of presidential actions on economic activity is generally modest. Neither Trump nor Biden deserves much credit or blame, especially in a global economy where economic activity is highly influenced by what is going on in the rest of the world.  We used to say that when the United States sneezed, the world catches pneumonia, but today the spread of influence, like the spread of COVID, goes both ways.

If you haven’t voted, I hope this helps you factor in the economy in your choice. If you have, please share it with others.  And I shall l turn my blogging attention back to less mundane and more philosophical matters.