MIXED MESSAGES WE GET ABOUT THE ECONOMY

 

              …The message that makes the worst impression on most Americans,                                     especially Californians

 

It’s extremely difficult to measure the economy, especially when more businesses are shuttering or opening.

 

The good news:

We got another strong labor report, which showed 372,000 new jobs were added in June. This is a slowdown from earlier in the recovery, but it’s still a gangbuster number by historical standards. Thanks to an unusually rapid labor-market recovery, there are more private sector jobs today than existed before covid-19.

Likewise, the unemployment rate, at 3.6%, is also great by historical standards. For context: There have been only three months in this century when unemployment got any lower.

Sure doesn’t sound like an economy in recession.

There’s really good stuff happening in the economy, implying we’re probably not in recession.  Such as, consumer spending has remained strong, even after adjusting for inflation.

About a third of workers say they plan to quit their jobs this year, not usually a sign of low confidence in the economy.

Not so good news:

There are also some extremely worrying signs, suggesting recession might be imminent.

Economic output, also known as gross domestic product (GDP), shrank in the first quarter of this year.  Some forecasts suggest it might have contracted again in the second quarter. Corporate profits fell earlier this year, too, and stock markets have been trending downward.

And, of course, the main party-pooper is the overall inflation.

The inflation reached yet another 40-year high in June, at 9.1% from a year earlier.  Energy prices drove much of the increase, but nearly everything Americans buy has gotten much more expensive, including groceries and rent.

This rising cost of living has been extremely painful, especially for low-income households. It’s the main reason that consumer sentiment just notched its worst reading ever recorded.

Americans might say they’re bummed about the economy and furious about inflation, but they don’t appear to be acting on that negativity yet.

So what do we make of these confusing signals?

If recent economic headlines have been giving you whiplash, you’re not alone. The economy has been sending lots of mixed messages. Every few days, a new report appears to give a wildly different impression of where things stand, and whether Americans should be basking in the boomtimes or battening down the hatches.

In fact, both narratives could be right.

One possibility is that some of these trends will stop contradicting each other once more data comes in and past numbers get revised.

The employment numbers, for instance, can be subject to huge revision, especially around times of turning points in the economy. It’s not because anyone is cooking the books. It’s genuinely difficult to measure hiring patterns in real time, especially when more businesses than usual are shuttering or opening.

But say you take the latest estimates at face value. Another way to explain some of these trends is this: The economy has been overheating. That explains why the labor market is strong, why people seem confident enough to quit their existing jobs and seek new opportunities, why they’re spending so much and why prices are rising so fast.

It also illustrates why recession worries are growing.

It’s all a bit confusing.

The standard prescription for an overheating economy is increasing interest rates to dampen demand. The Federal Reserve’s goal is to raise rates just enough to slow price growth, but not so much that the economy tanks. However, the worse the inflation numbers are, month after month, the more aggressively the Fed must act.

That is: The hotter the economy is, the more cold water is needed to douse the flames. And the more cold water is poured, the greater the likelihood that the economy will drown altogether.

Unfortunately, June’s inflation report was a scorcher. Markets have been pricing in increasingly sharper rate hikes. In May, for instance, the idea that the Fed might raise rates by three-quarters of a percentage point in a single meeting was perceived as being off the table. Then inflation numbers stayed uncomfortably high, and the Fed did announce a hike of three-quarters of a percentage point in June.  Also, very confusing.

That was the fastest pace of rate increases in nearly 30 years. When the Fed next meets, later this month, markets are expecting another hike of at least this magnitude, in fact, a full- one point hike now seems possible.

This is why markets are freaking out. It’s also why there is a growing threat of recession in the next year.

I don’t mean “recession” the way laypeople sometimes use the term, to mean “something feels bad in the economy.”

I mean “recession” as economists define it: a significant contraction in economic activity spread across the economy, usually showing up in incomes, jobs, GDP and other key metrics.

As lousy as most Americans feel about the economy now, when the metrics still look quite good!, the months ahead will probably feel a lot worse.

 Copyright G. Ater 2022