The Bureau of Labor Statistics just released the jobs numbers for January 2022. To the surprise of most economists, 467,000 jobs were added. That’s much better than the 199,000 jobs added in December 2021. While that is good news, in general, it could spell trouble in the near future.
6.9% GDP Growth Unsustainable
Most economists are expecting economic growth to slow in the current quarter. In the last quarter of 2021, the economy grew at a rapid 6.9% annual rate. Since the country is now producing about 2% more goods and services than was being produced prior to the pandemic, a 6.9% growth rate is not sustainable.
Most economists are forecasting GDP growth to be in the 4% range this year. That is a number that can easily be reached, as long as most of the 2.5 million workers who were employed prior to the pandemic, come back to work.. If they don’t, the excess demand will cause prices to rise even more than they did last year.
This is especially true since the Federal Reserve has said they will not raise interest rates until March, at the earliest. By then the monthly Consumer Price Index numbers will show that the annual inflation rate is 8% or more.
At the end of April, the estimate for GDP growth in the first quarter will likely show an annual growth rate in the 6% range. High growth and even higher inflation, clearly show an overheated economy. As noted in the past, the Fed will have to get very aggressive with interest rate increases.
That means a 0.50% interest rate increase in March or April, followed by four or five more increases before the end of the year. Next year at this time, interest rates will be 1.5 to 2 percentage points higher than they are now.
Biden Completely Off on Inflation
Based on his press conferences and speeches, President Biden doesn’t seem to understand the severity of the inflation problem. He also doesn’t seem to understand the impact of inflation on American consumers, nor does he propose any reasonable solutions to solve the inflation problem.
Rather, he says that increasing government spending by another $2 trillion or so, will reduce inflation. He also says that 17 Nobel prize winning economists agree with him. It is difficult to imagine any economist agreeing with that.
I don’t believe any economist would agree that increasing government deficit spending, especially after two years of $3 trillion annual deficits, will reduce inflation. Some high-profile economists try to spin this as “Modern Supply Side Economics,” which is simply wrong.
In his speech today, our President spoke of lowering child care costs, saying that some parents pay up to $14,000 per year in child care costs. He wants to reduce that cost to $7,000. But he really isn’t lowering the cost. He is simply saying that taxpayers will pay the other $7,000 for the parent.
Higher Taxes & Inflation
That means taxpayers will pay more taxes. But Biden keeps saying that only households that earn more than $400,000 per year will pay higher taxes. Households earning $400k-plus represent less than 2% of the population, so in the end we will all pay more.
Biden says he wants to bring down the cost of energy, noting how high gasoline and heating costs are. Since he has a policy of reducing the supply of fossil fuels, energy prices will rise further. Already the price of a barrel of oil has hit $90. Most economists are forecasting that because of increased demand, oil prices will likely exceed $100 per barrel by year end.
To encourage those workers who have not returned to the workforce since before the pandemic, Biden should stop paying them to not work. While he believes he is helping people who need help, many of his programs allow workers to receive free money from the government, which allows them to stay home
It is encouraging to see the economy adding nearly 500,000 jobs in January. It is discouraging to note that the economy will have trouble growing this year, without more input from labor. The most serious problem will be inflation.
Until the Fed fully stops its bond buying program and raises interest rates, and/or the Federal Government reduces deficit spending, inflation will soar even higher than the 7% recorded last year.
Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in Finance and Economics. He has written op-ed columns in major newspapers for more than 35 years.
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