It’s Not the Label that Counts
Terry H. Schwadron
July 28, 2022
Really, does it matter whether we declare that our economy has entered or is ushering in a “recession”? Isn’t what matters what the effect is on prices and income, jobs and stability?
By definition, a recession is the term used to describe consecutive quarters of decline in economic output, as measured by gross national production, and usually seen in an array of statistics covering income, spending and jobs.
But this time around, as those GDP numbers appear this week, apparently economists are sufficiently struck by simultaneous contradictory data as to be hesitant about a label suitable for the U.S. economy now.
Not so, of course, for the politicians on both sides of the aisle who have been loudly declaiming all year that something needs to happen to bring inflation and rising prices under control. For them, the economy and its labels are snarls to be hurled at political opponents, as if that fixes anything, and as if a different White House or Congress would change supermarket pricing. At the White House, there was scrambling over what message that a declaration of recession by numbers would mean politically.
Meanwhile, small businesses and consumers remain stuck with high prices. And with another looming increase in borrowing rates by the Federal Reserve expected today, we can start looking for layoffs or extended job vacancies along with slower general growth, including, presumably, in prices. Those are real measures that don’t need to rely on labels set by economists.
Higher borrowing costs traditionally lead to slower consumer spending, reduced business investment, slowdowns in housing markets or car loans, and pressure to reduce prices.
And, of course, U.S. voters will go to the polls in November with prices first on their minds.
As the Fed board met yesterday and voted to make borrowing more expensive, however, there are reminders that economics is a global problem.
The International Monetary Fund warned this week that the world economies are slowing towards a global recession amid food and energy pressures, and specifically as a result of both covid interruptions and the continuing ware in Ukraine. Russia’s unending assault on Ukraine has endangered global grain exports and showed that Russia is wielding gas and oil as weapons against European neighbors and customers.
China’s renewed covid problems has slowed its growth significantly, and the interruptions from disease have continued to adversely affect shipping and supply lines around the world.
In its World Economic Outlook, the fund said the world economy faces one of its weakest years since 1970, a period of intense stagflation across the globe.
Of course, at home, we consumers and voters don’t seem to care that the same problems are affecting others, as if we live in an economic bubble.
We don’t seem to get it that other countries have far worse inflation than we are seeing. The same voices that were so loud about the rise in gas pump prices are less vocal about a 65 cents per gallon easing over two months, and barely cognizant that U.S. fuel prices are less than those overseas.
Fed’s Blunt Tools
As economy master, the Federal Reserve finds itself under pressure to show that it can control inflation. For good or bad, its main tools are blunt — raising borrowing rates. And so, a couple of months after a big increase, as measured by its own standards of change, the Fed committed to another, similarly large hike.
Naturally, rather than praise the Fed, the political talk is that the United States is risking a deeper recession when the economy is slowing. As Fox News and others note, number of Americans filing for unemployment benefits has gradually increased, companies have announced layoffs or hiring freezes, and the housing market is softening. Gross domestic product slowed in the first quarter of the year by 1.6% and is expected to decline again in the second quarter.
Fed Chairman Jerome Powell keeps saying that failing to restore price stability would be a “bigger mistake” than crushing growth and causing a downturn.
Walmart and other retailers are warning investors of lower profits and reported that they are seeing consumers making fewer purchases. Food suppliers this week said in their public statements that price hikes were outpacing volume growth, meaning consumers were buying less at higher prices. Automakers were reporting profit drops as delivery of supplies and parts, including computer chips, continue to be problematic.
The point is that blame for Joe Biden or Democrats, sneering at the Fed or arguing about when to use the Recession label properly all do nothing to solve the balance between income and pricing. That takes time and actual work.