Key Point: Inflation-adjusted average weekly earnings year-over-year are down for 24 consecutive months and economic growth is anemic creating a stagflationary period at best or recessionary period at worst. The best way to let people prosper is free-market capitalism.
Overview: Government failures drove the “shutdown recession” and stagflationary period over the last three years that has plagued Americans, with more banking problems to come. This is fueled by the debt ceiling fight and likely elevate inflation for longer than many expected, with the only answers being less spending by Congress, less regulation by Biden administration, and less money printing by the Fed. The solution to these problems are pro-growth policies of shrinking government back to its constitutional roles.
Labor Market: The Bureau of Labor Statistic recently released its U.S. jobs report for March 2023. The reports continue to be mixed with signs of strength though underlying weaknesses remain.
The establishment survey shows there were +236,000 (+2.7%) net nonfarm jobs added in March to 155.6 million employees, which has increased by +4.1 million over the last year but just +3.2 million since February 2020 before the shutdowns. Over the last month, there were +189,000 jobs (+2.8%) added in the private sector and +47,000 jobs (+2.2%) added in the government sector. Most of the private sector jobs were added in the sectors of leisure (+72,000), private education and health services (+65,000), and professional and business services (+39,000), which the first two led over the last 12 months; retail trade (-14,600), construction (-9,000), manufacturing (-1,000), and financial activities (-1,000) had losses. Only retail trade (-15,200) declined over the last year.
The household survey had another increase of +577,000 jobs to 160.9 million employed in March, which there have been declines in net employment in four of the last 12 months for a total increase of +2.6 million since March 2022 and +2.1 million since February 2020. The official U3 unemployment rate ticked down to 3.5% and the broader U6 underutilization rate fell to 6.7%. Since February 2020, the prime-age (25-54 years old) employment-population ratio is up by 0.2pp to 80.7%, prime-age labor force participation rate was 0.1-percentage point higher at 83.1%, and the total labor-force participation rate was 0.7-percentage-point lower at 62.6% with millions of people out of the labor force holding the U3 rate artificially low.
Given some improvements, challenges remain for Americans as inflation-adjusted average weekly earnings were down -1.6% over the last year for the 24th straight month.
Economic Growth: The U.S. Bureau of Economic Analysis’ recently released the 1st estimate for economic output for Q1:2023. Table 1 provides data over time for real total gross domestic product (GDP), measured in chained 2012 dollars, and real private GDP, which excludes government consumption expenditures and gross investment. Most of the estimates for Q4:2022 and growth in 2022 have been revised lower, providing more evidence that 2022 was a very weak economy if not a recession.
Economic activity has had booms and busts because of inappropriately imposed government COVID-related restrictions in response to the pandemic and poor fiscal and monetary policies that severely hurt people’s ability to exchange and work. In 2022, the first two quarters had declines in real total (and private) GDP, providing a reason to date recessions every time since at least 1950. While the second half of 2022 looked better, those two quarters were influenced by net exports and inventories that would have made the economy much weaker. For 2022, real total GDP growth is reported +2.1% year-over-year but measured by Q4-over-Q4 the growth rate was only +0.9%, which was the slowest Q4-over-Q4 growth during a recover on record. Then the anemic growth in Q1:2023 provides more reason that this is an extended recession or at least stagflation. The Atlanta Fed’s early GDPNow projection on April 28, 2023 for real total GDP growth in Q2:2023 was +1.7% based on the latest data available.
If you consider the last expansion from June 2009 to February 2020, there was slower real private GDP growth in the latter period due to higher deficit-spending, contributing to crowding-out of the productive private sector. Congress’ excessive spending since February 2020 led to a massive increase in the national debt by nearly +$7.8 trillion that would have led to higher market interest rates. This is yet another example of how there is always an excessive government spending problem as noted in Figure 2 with federal spending and tax receipts as a share of GDP no matter if there are higher or lower tax rates.
But the Fed monetized much of the new debt to keep interest rates artificially lower thereby creating 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 Fed’s balance sheet exploded from about $4 trillion, when it was already bloated after the Great Recession, to nearly $9 trillion and is down only about 3.5% since the record high in April 2022 after rising nearly $400 billion in March then down $180 billion in April 2023. The Fed will need to cut its balance sheet (total assets over time) more aggressively if it is to stop manipulating markets (see this for types of assets on its balance sheet) and persistently tame inflation, as may need deflation given the rampant inflation over the last two years.
The resulting annual inflation measured by the consumer price index (CPI) has cooled some from the peak of +9.1% in June 2022 but remains at +5.0% in March 2023, which remains the highest since 2008 as do other key measures of inflation. After adjusting total earnings in the private sector for CPI inflation, real total earnings are up by only +2.3% since February 2020 as the shutdown recession took a huge hit on total earnings and then higher inflation hindered increased purchasing power. Just as inflation is always and everywhere a monetary phenomenon, deficits and taxes are always and everywhere a spending problem. David Boaz at Cato Institute notes how this problem is from both Republicans and Democrats.
In order to get control of this fiscal crisis which is contributing to a monetary crisis, the U.S. needs a fiscal rule like the Responsible American Budget (RAB) with a maximum spending limit based on the rate of population growth plus inflation. If Congress had followed this approach from 2003 to 2022, the figure below shows tax receipts, spending, and spending adjusted for only population growth plus chained-CPI inflation. Instead of an (updated) $19.0 trillion national debt increase, there could have been only a $500 billion debt increase for a $18.5 trillion swing in a positive direction that would have substantially reduced the cost of this debt 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 to top this off, the Federal Reserve should follow a monetary rule so that the costly discretion stops creating booms and busts.
Bottom Line: I expect stagflation will continue along with the a deeper recession this year given the “zombie economy” and the unraveling of the banking sector which will hit main street hard. Instead of passing massive spending bills, the path forward should include pro-growth policies that shrink government rather than big-government, progressive policies. It’s time for limited government with sound fiscal and monetary policy that provides more opportunities for people to work and have more paths out of poverty. There is some optimism with the House Republicans debt ceiling bill package but it’s got an uphill battle to become law with Democrats in the Senate and White House so more must be done.
· 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.
· Impose strict monetary rule with the Fed having a much smaller balance sheet and a much higher federal funds rate target until we End the Fed.
· Enact return-to-work policies.
Vance Ginn, Ph.D.