President Biden has recently made a one-word statement that explains his understanding of the economy today and where he expects it to be in the near future. Recently, when he was asked whether a recession for the US economy is inevitable, he simply answered, “No.”
Unfortunately, our president is wrong.
Not only is a recession inevitable but stagflation is beginning to look inevitable, too.
The first quarter of this year had gross domestic product (GDP) growth rate of negative 1.5%, even though nearly 1.7 million jobs were created. For the second quarter, job growth will slow, but most economists are forecasting growth to be in the 2% to 3% range. However, if they are wrong and the second quarter also shows negative growth, that would be the classic definition of a recession.
Incidentally, the reason for high job growth and a negative GDP is that productivity was minus 7.5%. That means the economy added about 1% more workers, but despite the increase in workers, the nation experienced a 7.5% drop in the amount of goods and services produced.
Even if second-quarter growth is positive, the third and fourth quarters could show very low and perhaps even negative growth. The reasons to see are relatively obvious.
Inflation will likely be running near a double-digit level by mid-summer. The monthly consumer price index (CPI) number for May, released in June, will exceed 1.0%. That will bring the annual inflation rate near 9%.
Food inflation is about to worsen. That’s because farmers are paying two to three times more for fertilizers. In addition, they have had to raise wages to attract enough workers. And the cost of diesel fuel to operate their equipment has doubled.
Add to that, the reduction in wheat and other grains due to the Russian invasion of Ukraine, and food prices this summer are bound to soar.
At the same time, the Federal Reserve is finally changing its shockingly irresponsible monetary policy. Because Fed officials are about a year late in acting, they will have to take very aggressive action to reduce inflation. They will do this by slowing the rate of growth of the money supply and raising interest rates through increases in the Federal Funds Rate.
In June, the Fed will raise rates by 50 basis points (BPS). In July, probably 75 BPS and maybe as much as 100 BPS. Mortgages, car loans and consumer credit will get much more expensive as a direct result.
As consumers spend more on necessities, they will have less to spend on everything else. That reduction in demand will eventually reduce business output and lead to a recession. Many of the indicators are already pointing that way.
The huge, nearly bear market drop in stock prices that has occurred over the past two months, could mean that investors see future earnings of corporations declining. If their expectations are that corporate earnings fall, stocks will be worth less, prompting investors to begin to shirk at price-to-equity valuations and to being to only be willing to pay less. During a recession, corporate profits fall.
Usually, personal income increases exceed the inflation rate, so consumers see a real increase in purchasing power. Today that is not true, so consumers are seeing a decline in their purchasing power and their standard of living. This usually occurs in a stagnant economy.
Retailers’ profits are falling even though their revenues are increasing. That happens when their sales increase by 8%, but their cost increases by 11%, which is the rate of the producer price index (PPI). If retailers can’t pass along price increases, the resulting loss forces them to reduce output, often leading to a recession.
Increases in employment numbers are not a good indicator of economic growth at this time. That’s because the increase in workers is not due to organic job growth, but, rather, from replacing jobs lost during the pandemic. Even though the economy today is producing more goods and services than before the pandemic, it is done with fewer workers.
The increase in employment will continue until firms have the number of workers that they had prior to the pandemic. But the economy will reach that point in the next month or two, meaning job growth will slow.
That means, of course, that although the President can boast that he had added 8 million new jobs, he really hasn’t added any “new” jobs.
Because 1.) energy prices will continue to rise, 2.) wages will rise with inflation, 3.) the federal government continues to run huge deficits and 4.) the Fed stays way behind the curve, inflation will be here with us for the foreseeable future. Add to that the coming food shortage, and inflation will worsen.
If the administration and the Fed cannot bring down inflation as the economy enters recession, stagflation is, unfortunately, the inevitable result. At this point maybe that seems inevitable, too.
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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