Growing up in the 1950’s I was a fan of the TV show Superman. The show began with the announcer looking up at the sky and saying, “It’s a bird, it’s a plane, it’s Superman!” I used a modified version of today’s column to answer the serious question of what kind of economy we are now have to add some humor. Many say the economy is not changing in the way we have typically seen in the past. As a result, there is confusion and concern about where the economy is going.
Numerous explanations have been given, some portending good times and some bad, but all point to unusual economic conditions. We hear phrases and terms like “soft landing of the economy”, “recession with full employment”, “recession of the rich”, “sliding recession” and “an economy that is eventually headed for a big crash”.
I will try to explain what all these terms and concepts mean. Then, as always, I’ll let you decide which picture of the economy makes the most sense.
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The different interpretations of the economy are divided into good and bad. On the plus side, there is a soft landing economy and a full employment economy, which I will focus on for now.
A soft landing for the economy is exactly what the Federal Reserve is trying to achieve with its rate hikes. By slowly raising interest rates over the past two years, the Fed wants to slow the pace of economic growth and make purchases more in line with the supply of goods and services. The result would be a reduction in prices and a lower rate of price increases. By taking this phased approach, the Fed hopes the economy will continue to grow, albeit at a slower pace, avoiding a slide into recession. A recession means that the economy is shrinking, i.e. getting smaller.
With the economy currently continuing to grow and inflation falling to 3% from 9% year-on-year, many believe the Fed could safely steer the economy down the path to lower inflation. The soft landing means inflation returns to normal levels without the pain of job losses and economic downturn. A soft landing is of course the best outcome for the country, but has been difficult to achieve in the past.
A full-jobs recession is a term several economists have used to describe today’s unusual economy. The idea is that the economy will eventually slide into recession, but that won’t have any impact on the job market. This is different because the accepted definition of a recession is that there is a broad economic downturn that includes job losses.
A full-employment recession means the non-labour part of the economy — like technology, machinery, finance and construction — will suffer. But the working part of the economy will not do that. Unlike a normal recession, in a full-employment recession the unemployment rate remains low and there are no aggregate job losses. Of course, as always, some companies will cut jobs, but these cuts will be offset by job gains in other sectors.
Why should the labor market be spared in a recession with full employment? This is a consequence of the COVID-19 pandemic and expected labor shortages. Many companies have struggled to hire workers during and after the pandemic. Reminders of these difficulties could motivate companies to keep employees, even if the companies suffer a drop in sales for a while. In addition, experts estimate that, looking ahead, the labor force will only grow at between 0.5% and 1% per year, less than half the rate of 50 years ago. Apart from a brief rebound in the early 2000s, labor force growth has been steadily declining for five decades. The weak labor market outlook is another reason why companies want to keep their workforce even in relatively difficult times.
Now for the bad interpretations of today’s economy. Some argue that the economy is already in recession, but the difference is that it’s mostly confined to the wealthy, hence the name wealthy recession. The tech sector, which pays twice the wages of other jobs, shed more than 650,000 jobs in 2022 and the first half of 2023. This represents a $65 billion loss of purchasing power and has hurt businesses that serve higher-income consumers. In contrast, workers in lower-paying jobs received the highest wage increases this decade. This is because many of these workers have become more valuable to businesses due to labor shortages in multiple sectors of the economy.
Another interpretation of the current economic situation is another new term: a rolling recession. Here, a recession is rolling through the economy, not affecting all sectors at once, but each at different times. Service sectors were hit first as people remained reticent about face-to-face interactions due to COVID-19. Companies that manufactured products did well as consumers bought items like furniture, clothing and vehicles that they couldn’t get hold of during the pandemic. Therefore, a recession hit service companies first, but product companies were spared.
Eventually, this dichotomy was reversed, as higher interest rates made many products too expensive and the fear of in-person contact that came with buying services lessened. Now the recession has bypassed the service companies and is hitting the product companies as well.
The last point is the stance that while the economy looks reasonably good today, a big crash is imminent at some point. Proponents of this idea say that rising interest rates combined with high and rising debt will eventually lead to an economic implosion.
Are you confused about today’s economy? Don’t worry, you have company; Even economists are at a loss. I hope I was able to give you an overview of the different interpretations that will help you decide how to navigate today’s uncertainty.
Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.
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