Top Stat: Average weekly earnings (inflation-adjusted) down 3.7% year-over-year Link
Key Point: The recession will get worse before it gets better because of costly policies out of D.C.
Overview: The shutdown recession from February to April 2020 and subsequent government failures have led to a longer, deeper recession with generation-high inflation that will have long-lasting consequences for many Americans’ livelihoods. This includes excessive federal spending redistributing scarce private sector resources that contributed to more than $7 trillion in deficit spending since January 2020 to reach the new high of $31.3 trillion in national debt—about $94,000 owed per American or $248,000 owed per taxpayer. This new debt added fuel to the fire as the Federal Reserve monetized most of it, creating 40-year-high inflation rates, substantially reducing our purchasing power even when accounting for increases in earnings. The transitory inflated boom continues to bust into a long, deep recession with high inflation, which hasn’t happened since E.T. was the top grossing movie in 1982. The failed policies of the Biden administration, Congress, and the Fed must be replaced with a liberty-preserving, free-market, pro-growth approach so there are more opportunities to let people prosper.
Labor Market: The U.S. Bureau of Labor Statistics recently released the U.S. jobs report for October 2022. The payroll report shows there were 261,000 net nonfarm jobs added last month, with 233,000 added in the private sector. The official U3 unemployment rate increased to what remains a historically low rate of 3.7%, but challenges remain. These challenges include about a 3.7% decline in average weekly earnings (inflation-adjusted) over the last year--which is the 19th straight decline, a 0.7-percentage point lower prime-age (25–54 years old) employment-population ratio than in February 2020, and a 1.2-percentage-point lower labor-force participation rate with millions of people out of the labor force.
Things look worse when you consider the household survey, which employment declined by 328,000 jobs last month and has declined in three of the last seven months for a total increase of just 150,000 jobs since March 2022 (this is when I would date the 2022 recession). This goes along with my warnings for months of a “zombie economy.” This includes “zombie labor” as many workers are sitting on the sidelines and others are “quiet quitting” while there’s a declining number of unfilled jobs than unemployed people. And that demand for labor is likely inflated from many “zombie firms,” which run on debt and could make up at least 20% of the stock market and will likely lay off workers with rising debt costs.
Data compare the following: 1) June 2009—Dated trough of the 2007-09 U.S. recession, 2) February 2020—Dated peak of the last expansion, 3) April 2020 is dated trough of the 2021 recession, and 4) October 2022 is the latest period.
Economic Growth: The U.S. Bureau of Economic Analysis’ released economic output data for Q3:2022. The following provides data for real total gross domestic product (GDP), measured in chained 2012 dollars, and real private GDP, which excludes government consumption expenditures and gross investment.
The shutdown recession contracted at historic annualized rates because of individual responses and government-imposed shutdowns related to the COVID-19 pandemic. Economic activity has had booms and busts thereafter because of inappropriately imposed government COVID-related restrictions in response to the pandemic that severely hurt people’s ability to exchange and work. In 2021, the growth in nominal total GDP, measured in current dollars, was dominated by inflation, which distorts economic activity. The GDP implicit price deflator was up 6.1% for Q4-over-Q4 2021, representing half of the 12.2% increase in nominal total GDP. This inflation measure was up by 9.1% in Q2:2022—the highest since Q1:1981—for an 8.5% increase in nominal total GDP. This made two consecutive declines in real total (and private) GDP, providing a criterion to date recessions every time since at least 1950. And with nominal total GDP of 6.7% in Q3:2022, there would have been a third straight decline in real GDP had inflation been as high as it was GDP would have declined in Q3:2022 had inflation of 4.1%, which was down as oil and gas prices declined from their peaks, been as high as it was in the last three quarters or had the contribution of net exports of goods and services not been 2.8%. The Atlanta Fed’s early GDPNow projection on November 17, 2022, for real total GDP growth in Q4:2022 was 4.2%, but this measure has been volatile lately.
The table above also shows a historical comparison of the last expansion from June 2009 to February 2020 that had average annualized growth of 2.3% in real total GDP and 2.8% in real private GDP. The earlier part of the expansion had slower real total GDP growth but had faster real private GDP growth. A reason for this difference is higher deficit-spending in the latter period, contributing to crowding-out of the productive private sector. With excessive spending bloating the national debt thereafter, the Fed has monetized much of the new debt instead of allowing many interest rates to rise to a market-determined rate. This resulted in higher inflation as there has been too much money chasing too few goods and services as production has been overregulated and overtaxed and workers have been given too many handouts. The resulting inflation in the consumer price index (CPI) is 7.7% in October 2022 over the last year, which has moderated from its peak of 9.1% in June 2022 but is the highest rate since January 1982. After adjusting total earnings in the private sector for CPI inflation, real total earnings are essentially flat in October 2022 since February 2020 as inflation has limited people’s purchasing power. Elevated inflation will continue until the Fed more sharply reduces its balance sheet to provide a positive real federal funds rate target.
Just as inflation is always and everywhere a monetary phenomenon, high deficits and taxes are always and everywhere a spending problem. As the federal debt far exceeds U.S. GDP, and President Biden proposed an irresponsible FY23 budget and Congress never passed one, America needs a fiscal rule like the Responsible American Budget (RAB) with a maximum spending limit based on population growth plus inflation. If Congress had followed this approach from 2002 to 2021, the (updated) $17.7 trillion national debt increase would instead have been a $1.1 trillion decrease (i.e., surplus) for a $18.8 trillion swing to the positive that would have reduced the cost to Americans. The Republican Study Committee recently noted the strength of this type of fiscal rule in its FY 2023 “Blueprint to Save America.” And the Federal Reserve should follow a monetary rule.
Bottom Line: Americans are struggling from bad policies out of D.C., which have resulted in a recession with high inflation. Instead of passing massive spending bills, like passage of the “Inflation Reduction Act” that will result in higher taxes, more inflation, and deeper recession, the path forward should include pro-growth policies. These policies ought to be similar to those that supported historic prosperity from 2017 to 2019 that get government out of the way rather than the progressive policies of more spending, regulating, and taxing. The time is now for limited government with sound fiscal and monetary policy that provides more opportunities for people to work and have more paths out of poverty.
· Set a pro-growth policy path with less spending, regulating, and taxing at all levels of government.
· Reject new spending packages that America cannot afford nor needs; pass the RAB instead.
· Enact return-to-work policies; impose strict fiscal and monetary rules—with the Fed having a much smaller balance sheet and a much higher federal funds rate target until we End the Fed.
Vance Ginn, Ph.D.