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.

Watching You (Economic) Language

The words inflation, recession, and stagflation have been tossed about by lots of political commentators who apparently either flunked college economics or rinsed their brains out too thoroughly with beer to remember any of it.  Perhaps, as an economist, I can shed a bit of right on these terms and how we measure and predict recessions and their companion ,expansions.

No, we are NOT in a recession. The stock market has  taken a nosedive, and while it matters—the value of all our pensions and retirement savings are down from their highs of 2021—it’s not even close to a gauge of our overall economic health. The stock market had been rising rather spectacularly over the last few years and was overdue for a correction.  Let’s look, instead. at the indictors that measure a recession–the unemployment rate and the rate of growth of GDP. A recession may mean too little money in circulation to enable consumers to buy an excessive stock of goods. That situation can result if excessive optimism about sales runs ahead of the ability of the economy to find buyers, resulting in rising inventories of unsold goods.  As firms cut back on production and lay off workers, inflation subsides, unemployment rises, and we are in a recession. GDP is projected to grow a respectable 3.5 percent for 2022, with a projected  slowdown in inflation, and the unemployment rate remains an impressively low 3.6 percent. A recession is officially defined as two successive quarters (= six months) of falling output, or GDP. That has not yet happened. If we were in a recession, we would see little or no inflation, rising unemployment, and a backlog of unsold goods and services. Sorry, guys, not a recession.

Inflation rarely accompanies a recession.  Inflation means rising prices of goods and services over a period of time, is sometimes described as the result of too much money chasing too few goods.  Inflation can result from too much money in the economy, the result of low interest rates at the Federal Reserve and a lot of pumping recovery money into the economy under both the Trump and Biden administrations in 2020 and 2021.  Now that interest rates are back to more historically normal levels and most of that extra cash pumped into the economy has been spent, too much money is not a continuing problem.

Inflation can also result from  competition for too few goods relative to consumer demand, and that’s a large part of what we are observing right now.  The pandemic. The labor shortage, due to lack of immigrants and the great resignation (people dropping out of the labor force during the pandemic), which drives up wage costs and therefore prices. The supply chain bottleneck. The loss of fossil fuels and wheat from Russia and Ukraine during the current war.   We have seen all kinds of shortages in the last year, but the biggest ones are a shortage of workers, shortages of many foodstuffs due to climate change, drought, and the Russian war against Ukraine, and the shortage of fossil fuels, which affects not only household transportation but also the cost of goods being shipped long distances in a global economic network. Some of these bottlenecks, particularly in air transportation, are due to layoffs of key personnel during the travel doldrums of the pandemic and the ability to ramp up again when demand returns.  It’s hard to produce truck drivers, pilots, and mechanics after many of them have retired, changed occupations, or just don’t want the job anymore. Labor markets work pretty well at attracting new workers by raising wages and benefits and improving working conditions, but the shocks of the last few years  are going to impact the economy for some time to come.

There’s been lots of vague references to stagflation.  That isn’t happening either.  In the 1970s, a series of supply shocks to the world economy resulted in rising prices, interest rates and unemployment rates. The monetary and fiscal tools that governments use to try to dampen fluctuations in economic activity are not very useful with stagflation. The tools to fight inflation are higher interest rates, less government spending or borrowing, higher taxes. The tools to fight slow growth and rising unemployment are lower interest rates, government deficits, increased government spending, lower taxes.

 Fortunately, stagflation is NOT our current problem.  It’s a whole lot easier to prescribe policies when you have the either of the more normal situations–high unemployment and stable prices, or low unemployment and inflation.  However, those tools tend to focus on pumping up or tamping down demand, and that’s not the problem right now.  What we are facing now, not just in the US but across the globe, is a supply problem, shortages of not only goods and services but also workers, and especially workers with specialized skills.  The Federal Reserve is cautiously raising interest rates and the federal government has reduced its budget deficits, but the real challenge is trying to lure more workers into the labor market and work on some of the supply problems that have created empty shelves and car lots at dealers and flight cancellations.

The good news is that we know which tools are useful.  The bad news is it will take some time to address the supply issues.  The other good news is rising wages and low unemployment.  As a general rule, working class and lower income households are better with a little inflation as long as wages keep pace, and for the past year wages have risen pretty dramatically, especially at the bottom of the scale. Signing bonuses and a de facto minimum wage approaching $15 an hour can do a lot to offset rising prices.  Low to middle income households have little in the way of financial assets that lose purchasing power during inflation, while wealthier families have more job security and more to lose from inflation in the value of their investment portfolios.  In fact, the average person on the bottom of the pyramid has more debt than assets, and the value of the dollars paid back are less than the value of the dollars borrowed. Maybe the self-interest of the talking heads class and their sponsors is the reason why we hear a drumbeat about inflation but no mention of low unemployment rates and opportunities to find a decent job at a reasonable salary?

What is there to take away from this quick trip through what old-time economists (like me) used to call business cycle theory? It’s not a recession yet, and I can’t see one being declared before the November elections. Anyone calling it stagflation needs to go back to school for remedial economics. We know what tools to use on inflation, but their effectiveness depends on getting past supply problems, and that takes time.  Treating workers well in both earnings and working conditions is always good business policy, but even more so right now. We could use a few more of those hard-working  immigrants to fill the labor ranks and more investment in skills at the next level to rebuild our labor force.  The stock market isn’t the economy, and the health of the stock market  matters more to those who have been getting all the tax cuts and contributed al the big money to political campaigns than to the bottom 90 percent.

See?  Economics isn’t all that dismal.  Sometimes it’s actually hopeful—and helpful.