Be cautious about recession predictions
Should we trust these projections, which dominate major news
reports on the economy? Count me a skeptic, given what the economic performance
data show and the conflicted interests of commercial economists.
In a piece typical of news articles last week, CNN reported:
“Former Federal Reserve Chairman Alan Greenspan believes a US recession is the
‘most likely outcome’ of the Fed’s aggressive rate hike regime meant to curb
inflation. He joins a growing chorus of economists predicting imminent economic
downturn.”
Then, without attribution, CNN added, “His views are
particularly important” because he was Fed chair from 1987 to 2007 under
Presidents Reagan, Clinton, and both Bushes.
Unmentioned by CNN and others: Greenspan couldn’t foresee the
mortgage market collapse that led to the Great Recession in late 2007, the
worst economic downturn since the Great Depression.
That’s amazing because Greenspan, now 96, cultivated an image as
a clear-eyed and profound student of economic statistics. So how did he miss
years of economic red lights flashing that housing prices were headed for a
collapse? It was so evident that I told my The New York Times editors
about the problem in 2003 and then twice found a way to write about it even though it was far beyond my
beat covering taxes.
In weighing Greenspan’s prognostications, remember that Ayn “Love
Is Immoral” Rand trusted him to be the executor of her estate.
Greenspan adored the views of Rand, who taught that altruism is a vice,
selfishness a virtue, and who wrote a novel glorifying a criminal who blows up
a building because it offended his aesthetics.
Greenspan’s views are, technically and philosophically, on the
fringe, yet he gets treated like a centrist.
Indicators
That said, how is our economy doing? Let’s examine some key
indicators.
The economy added a healthy 233,000 jobs in December.
Employers created more than four and a half million jobs in
2022. That’s an average of 375,000
new jobs per month, almost twice the rate of jobs growth during the
Trump Administration’s pre-pandemic years.
Indeed, 2022 was the second-best year ever for job growth. The best year was 2021, but much of that was due to our coming out of the worst of the pandemic, which Donald “inject bleach” Trump badly mismanaged, pushing the jobless rate to almost 15%. Most of those discharged performed manual work. People who do intellectual work mostly continued working.
For context, consider job growth under Barack Obama and Trump.
President George W. Bush’s laissez-faire banking policies produced
the Great Recession, so we’ll ignore the economic results he bequeathed to
Obama. Then, starting in October 2010, when the economy turned around, Obama
averaged 201,600 new jobs per month for six years.
Trump, before the pandemic, averaged just 191,100 jobs added.
That’s 5% less per month than Obama and barely half of Biden’s 2022 monthly
average.
Voluntarily Quitting
How about job quits? The level at which people voluntarily leave
their job says a lot about expectations that they will or already have found
new work, often at better pay or under better conditions. People who see a
recession looming usually stay put, even in a job they hate.
Each month starting in July, more than 4 million workers quit
their jobs voluntarily. The November quit rate was a
robust 2.7% or 1 in 37 jobs, although that’s down from the 3% rate a year
earlier.
Very Low Jobless Rate
How about unemployment? The jobless rate last month was 3.5%
under the most widely used measure.
That’s the lowest recorded level of joblessness since World War
II save the slightly lower 3.4% rate in May 1969 when Vietnam War and NASA
spending were boosting the economy, and early Boomers were entering the job
market en masse without driving up the jobless rate.
Trump’s average pre-pandemic jobless rate was 3.9% though he hit
3.5% for three months shortly before the Pandemic began in early 2020.
There is an alternative and broader measure of
unemployment, known as U-6 or Bureau of Labor Statistics Table
A-15.
U-6 counts people working part-time because they can’t find
full-time employment, or are only marginally part of the workforce, or have
temporarily given up trying to find work. These marginal workers, whose
economic lives are filled with stress and misery, are not central to whether
the economy grows or shrinks, but their numbers tell a deeper story about job
quality.
The U-6 rate was 6.5% in December, down from 7.3% a year
earlier. However, that doesn’t seem to suggest that a recession is at hand.
Inflation Abating
How about rising prices? While inflation is about 7.1% above a
year ago, that isn’t the story of the last half year.
Month-over-month inflation peaked at 1.3% in June.
Then it dropped to zero in July and 0.1% in August. Inflation rose to
0.4% in September and October. It fell back to 0.1% in November. The
December numbers should come out around Jan. 13.
Inflation may be whipped, although it could roar back. But for
now, its withering
The decent inflationary trend appears to have grown from the
pandemic when demand for goods and services fell sharply, and global supply
chain problems bedeviled businesses from toy sellers to carmakers. Remember all
those acres of parking lots with shiny new cars and trucks that could not be
sold until computer chips arrived from Asia? And those shipping containers
piled high in ports awaiting trucks to haul them away?
Those bottlenecks have been eliminated or considerably eased through
White House efforts to improve coordination and cooperation between merchant
sailors, stevedores, teamsters, local port, truck, and railroad managers, and
the companies that employ them all.
Still, high energy and food prices continue to bedevil most
Americans. Fossil fuels are a major component in food prices. It takes lots of
fuel to make fertilizers to grow crops, machines to plant and harvest them, and
trucks to berry foodstuffs to grocery stores nationwide.
Overall Economic Growth
How about economic growth measured by Gross Domestic Product or
GDP?
There was a lot of ill-informed talk of a recession last summer
because GDP was slightly negative for the year’s first half.
But the National Bureau of Economic Research’s Business Economic Cycle Dating Committee, which calls
economic contractions and expansions, didn’t call it a recession, partly
because the number of jobs kept growing, as did incomes. More jobs and more pay
are the opposite of what the word recession implies: “a
significant, widespread, and prolonged downturn in economic activity.”
We don’t have the full 2022 data yet, but the federal Bureau of
Economic Analysis shows overall economic growth, not contraction in the first nine months
of 2022.
Economic Growth by Industry
By the way, Trump’s economy was slowly sinking before the pandemic, as DCReport advised readers in October 2020.
Pump Price Plummets
And what of inflation, much in the news this year?
The best news is that the national average price of gasoline has plummeted from a high of $5.11 in
early June to $3.77 recently. That’s $1.34 less per gallon, a stunning 26%
decline, not that it made much of a splash on front pages and broadcast news
programs.
The sharp drop in the price of gasoline came despite Vladimir
Putin’s February invasion of Ukraine which disrupted worldwide oil and grain
markets and may yet lead to mass starvation in Syria and parts of North Africa
that rely on Ukrainian wheat. The Biden Administration imposed severe price
caps on Russian oil via shipping insurance. At the same time, the
president released 180 million barrels of oil from the
American Strategic Petroleum Reserve to help knock down prices at the pump.
That 180 million barrels is roughly how much oil America burns
every ten days, but as is often the case in economics small changes in supply
or demand can prompt big changes in price, as our coverage of electrify
market manipulations has shown.
Because the Democratic Biden Administration sold oil at about $89
a barrel and will buy replacement oil at about $70 a barrel, the government is
expected to turn a profit of more than $3 billion on actions that sharply
lowered gasoline prices. Talk about win-win government economic policies.
An inflationary threat that may emerge is tied to rising sales
of what two decades ago were called Osama Wagons—gas-guzzling
trucks and SUVs that help sustain Middle East dictatorships.
Trade Deficit Shrinks
Trade numbers are also improving under Biden Administration
policies, although there was a brief and severe rise in the trade deficit
months ago.
During Trump’s first 23 months in office his disastrous and
mismanaged trade war with China played a key role in the monthly trade
deficit ballooning by 26%, federal Bureau of Economic Analysis
data show.
The trade deficit, or surplus, comes in two parts. The first and
larger measures the value of goods we buy from overseas versus what we sell to
foreigners. The second measure is business services we buy from foreigners or
sell them.
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| America’s Chronic Trade Deficit Shrinks |
Our perennial surplus of exported services slightly offsets a perennial and much larger deficit in goods. President Biden has made cutting reliance on overseas manufacturers—especially for computer chips and other high-value, high-tech products—a top priority.
As of November, the deficit is down 3.6% compared to when Biden
took office two years ago.
Mortgages and Paychecks
Another good sign, and a longer-term trend, is the falling share
of personal income going to interest and principal payments on mortgages.
At the end of 2007, as the Great Recession began, Federal
Reserve data showed 7.2% of personal income went to mortgage
principal and interest. Now it’s less than 4%, with a slight uptick last year
as the Federal Reserve under Chairman Jerome Powell, a Trump appointee, raised
the interest rates it controls.
Americans owe about $12 Trillion in mortgage
debt, down almost a fifth since the start of the Great Recession
once inflation is considered.
So why do so many people feel so much economic pain?
The median weekly wage—half earn more, half less—is the same now as at the end of 2019 after taking
inflation into account.
So why is the median not moving much?
Because a rapidly growing share of wages and salaries goes to
executives and others paid more than $1 million per year while rank-and-file
workers mostly lack unions and thus lack bargaining power.
Million Dollar Paychecks
In 2020 an eye-popping 82% of all pay raises went to the very thin and
well-compensated slice of workers making $1 million or more.
That fell to 29% in 2021. However, the million-and-up club
enjoyed average raises of $840,000 each while
full-time workers making up to $250,000 got only $1,600. That’s a ratio of $500
to $1.
Also in 2021, the poorest-paid 60 million workers collectively
made less than the best-paid 237,000, more than 500 of whom averaged about $151
million, my annual analysis of Social Security Administration payroll data shows.
The million-dollar and up pay club now collects almost 7% of all
wages and salaries, up from 2% in inflation-adjusted data from 1991. The number
of these high-paid workers has exploded from 191 in 1991 to 237,000 three
decades later in 2021. Last year the number of million-dollar-plus jobs grew 95
times faster than jobs overall.
Recession Risks
So, are we likely to fall into a recession, as Greenspan and
many Wall Street economists warn?
The honest answer is we don’t know. As Yankees catcher Yogi
Berra said, “it’s tough to make predictions, especially about the future.”
If the Fed raises interest rates too high or too fast, it could
so discourage executives and entrepreneurs that they go on a capital strike, halting
the new investment that is crucial to job creation. Then again higher interest
rates may also draw more capital into the United States, further strengthening
the dollar against other currencies.
When the dollar is high relative to other currencies, it makes
what we import cheap, while other countries are burdened with high prices to
purchase our goods and services.
The greenback has been riding very high for the past two
years. My wife and I vacationed in New Zealand (beautiful, fascinating,
and friendly) this fall. Our greenbacks were worth $1.78 against the Kiwi
dollar. In Australia, the exchange rate was above $1.60. The story is similar
worldwide.
My view on the chance of a recession: bringing back jobs from
Taiwan and China, especially microchips and related high-tech manufacturing,
will be a long-term boon to the American economy with some immediate effects.
If Biden succeeds in his goal of making America the go-to
country for high-quality, high-tech manufacturing the American economic future
will be bright. It will also enrich investors more than workers unless the
union movement or a proxy for it becomes a major player in economic
decision-making.
And as for the policies of the Fed?
It’s independent so you can’t do anything about how its regional
governors vote on interest rates and whether money is hard or easy. But the
notion that a recession is certain or even likely seems out there, at least for
now.
David Cay Johnston co-founded DCReport. He is a
best-selling author and investigative journalist who for 13 years reported for
The New York Times. Johnston is a specialist in economics and tax issues. He
won a 2001 Pulitzer Prize. He teaches at Syracuse University College of Law.