Clint Eastwood has long been one of my favorite actors, ever since his television series Rawhide in the 1950’s and 1960’s. One movie that made him a star was The Good, the Bad and the Ugly. With a slight change to “The Good, The Bad, and the Uncertainty,” this title is a great description of today’s economy. This is because the current economy has some bad aspects along with some good aspects, rounded out by some uncertain aspects. In today’s column, I’ll try to outline some of the individual components, but I’ll leave it up to you to decide which dominates.
There are many “good” aspects in today’s economy. The broadest measure of the economy – gross domestic product (GDP) – continues to grow. This means that the overall size of the economy is growing, generating more production and income. The rule of thumb for a recession is two consecutive quarterly declines in GDP. So by that definition, we weren’t in a recession.
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The labor market continues to gain. Although job growth is not as strong as it was immediately after the pandemic, new jobs are being created at a healthy pace. The unemployment rate is now 3.4%, the lowest since 1953 (when I was 2 years old). A broader measure of the unemployment rate, which includes people who have stopped looking for work, is showing a downward trend.
The increase in employment has reduced the labor shortages that have emerged during and after the pandemic. For every unemployed person there is currently only half of the vacancies. That’s down from almost five vacancies per unemployed person at the peak of the pandemic and a decline from over one vacancy per unemployed person two years ago.
The improvement in labor shortages has been a tremendous help to those industries that have struggled to find workers in the wake of the pandemic. In recent months we have seen strong job growth in hospitality, manufacturing, government and healthcare, with some of these sectors returning to pre-pandemic employment levels.
But perhaps the biggest positive trend has been the moderation in price growth – also known as inflation. Don’t get me wrong, average prices are still going up, but they’re going up at a slower pace. For example, the inflation rate reached 9.1% year-on-year last summer. The latest inflation gauge, measuring the change in average prices from April 2022 to April 2023, shows that the rate is now 4.9%. The slowdown in inflation means more workers are raising wages to keep up with rising prices.
Now coming to the “bad” part of the economy and let me start with inflation. Although price increases are slowing down, this does not mean that prices are falling. Some fall, but most don’t. Don’t expect most prices to return to pre-pandemic levels of 2019. This means that many people will continue to have a lower standard of living than they did four years ago.
While the overall economy continues to grow, there are some parts of the economy that are declining. There are signs of a significant slowdown in construction and manufacturing. The same applies to the sale of existing houses. What these sectors have in common is the importance of interest rates. As interest rates on loans have risen, financing large projects and purchases has become more expensive.
Data shows that consumers also suffer from additional stress. Retail sales have declined in four of the last five months. The average household income – adjusted for inflation – is lower than before the pandemic. After a pause during the pandemic, consumer debt levels have recently accelerated. The savings accumulated by households during the pandemic have plummeted.
Two major issues dominate the uncertain category – banking problems and a potential default on US debt. The collapse of three major banks this year shocked the economy and sparked fears it was just the beginning of a bigger problem. My assessment of the situation is that no widespread bank failure is imminent. Still, a bank failure raises concerns about the safety of our savings.
We have seen the drama of raising the debt limit many times before. Luckily, compromises between competing views and policies have always been made—although some have come about literally at the last minute. That’s still my expectation. But if I’m wrong and a debt containment plan is not achieved that prevents a US default, then we are entering new territory. At the very least, I would expect interest rates to rise.
Now that I’ve given you my Clint Eastwood version of economics, what should you expect? I think there are three options. The first is best – a slowdown in economic growth, but not a halt to growth, leading to a typical recession. Jobs are not lost. The slowdown leads to a further weakening of inflation, and the Federal Reserve begins to cut interest rates in the first half of 2024. This is the result of the so-called “soft landing”.
The second option is the opposite of the first. Eventually, in late 2023 or early 2024, the economy slips into a normal recession. Businesses are retreating and unemployment is rising. The only good news is that the recession is relatively short and shallow and the unemployment rate has risen from 3.4% to a range between 5% and 5.5%. By the summer of 2024, growth will resume and the inflation rate will be significantly lower.
The third option is a hybrid. Modest job growth continues, but the economy is suffering on the “capital” side, causing losses for investors in everything from buildings and equipment to stocks. This scenario could actually lead to a larger overall financial collapse than the second option, but there would still be a recovery in mid-2024.
Hopefully my economical version of The Good, the Bad and the Uncertain will have a mostly happy ending. Are we witnessing a script that turns out like this? You decide.
Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.
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