Key Point: The U.S. economy in 2022 had the slowest Q4-over-Q4 growth during a recovery since at least 2009 and average weekly earnings are now down for 22 straight months as inflation keeps roaring. But there’s hope if we just give free-market capitalism a chance to let people prosper.
Overview: Although President Biden recently tried to claim that the state of the union is strong, facts tell a different story. The government failures that drove the “shutdown recession,” high inflation, and weak economic growth over the last three years continue to plague Americans. This includes excessive federal spending leading to massive deficit spending adding up to $7 trillion since January 2020 to reach nearly $31.5 trillion in national debt—about $250,000 owed per taxpayer. This has created a fight between the Biden administration and House Republicans over the debt ceiling, as raising it must come with spending restraint to avoid some of the fiscal insanity that will lead to insolvency if nothing is changed. And more inflation could be on the horizon if the Federal Reserve chooses to monetize more more of the new debt, which past excess has already contributed to 40-year-high inflation rates. These government failures with little relief from pro-growth policies in sight mean that things will get worse before they get better.
Labor Market: The Bureau of Labor Statistic recently released its U.S. jobs report for January 2022. This report came with substantial revisions to seasonal adjustments and population estimates which could bias the data for a while given that the revised estimates include the much of the last three years of data that are highly volatile. And recall the recent report by the Philadelphia Fed finds that if you add up the jobs added in states in Q2:2022 there were just 10,500 net new jobs rather than more than 1 million reported.
The establishment survey shows there were +517,000 (+3.3%) net nonfarm jobs added in January to 155.1 million employees, with +443,000 (+3.6%) added in the private sector and +74,000 (+1.4%) jobs added in the government sector. Most of the private sector jobs were added in the sectors of leisure and hospitality (+128,000), private education and health services (+105,000), and professional and business services (+82,000), which these three sectors led over the last 12 months as well; information (-5,000) and utilities (-700) were the only net job declines over the last month and no sector had net job losses over the last year. Average hourly earnings for all employees was up by 10 cents last month to $33.03, or up by +4.4% over the last year. And average weekly earnings in the private sector increased by $13.35 last month to $1,146, or up by +4.7% over the 12 months.
The household survey had another large increase of +894,000 jobs added to 160.1 million employed There have been declines in net jobs in four of the last 10 months for a total increase of +1.8 million since March 2022, which is about half of the +3.6 million of the net jobs added per the establishment survey. The official U3 unemployment rate declined slightly to 3.4% which is the lowest since 1969.
But challenges remains as inflation-adjusted average weekly earnings were down -1.5% over the last year for the 22nd straight month, weighing on Americans budgets to make ends meet. And since February 2020 before the shutdown recession, the prime age (25-54 years old) employment-population ratio was 0.3-percentage point lower, prime-age labor force participation rate was 0.3-percentage point lower, and the total labor-force participation rate was 0.9-percentage-point lower with millions of people out of the labor force thereby holding the U3 unemployment rate much lower than otherwise.
Economic Growth: The U.S. Bureau of Economic Analysis’ recently released the 2nd estimate for economic output for Q4:2022. The following table 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. And most of the estimates for Q4:2022 and growth in 2022 were revised lower, providing more evidence that 2022 was a very weak year if not a recession.
The shutdown recession in 2020 had GDP contract 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 and poor fiscal policies that severely hurt people’s ability to exchange and work.
Since 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 +6.1% for Q4-over-Q4 2021, representing half of the +12.2% increase in nominal total GDP. This inflation measure was +9.1% in Q2:2022—the highest since Q1:1981—for a +8.5% increase in nominal total GDP that quarter. This made two consecutive declines in real total (and private) GDP, providing a criterion to date recessions every time since at least 1950. In Q3:2022, nominal total GDP was +7.6% and GDP inflation was +4.4% for the +3.2% increase in real total GDP. But if inflation had been as high as it was in the prior two quarters or had the contribution of net exports of goods and services (driven by natural gas exports to Europe) not been 2.9%, real total GDP would have either declined or been essentially flat for a third straight quarter.
In Q4:2022, there was a similar story of weakness as nominal total GDP was +6.6% and GDP inflation was +3.9% for the +2.7% increase in real total GDP. But if you consider the +2.7% real total GDP growth was driven by contributions of volatile inventories (+1.5pp), government spending (+0.6pp), and next exports (+0.5pp) which total +2.6pp, the actual growth is quite tepid like it was in Q3:2022. For all of 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 for a year since 2009 (last part of Great Recession).
The Atlanta Fed’s early GDPNow projection on February 24, 2023 for real total GDP growth in Q1:2023 was +2.7% based on the latest data available.
The table above also shows the last expansion from June 2009 to February 2020. A reason for slower real private GDP growth in the latter period is due to higher deficit-spending, contributing to crowding-out of the productive private sector. Congress’ excessive spending thereafter led to a massive increase in the national debt by more than +$7 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 the following figure 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 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 6.5% since the record high in April 2022. The Fed will need to cut its balance sheet (see first figure below with total assets over time) more aggressively if it is to stop manipulating so many markets (see second figure with types of assets on its balance sheet) and persistently tame inflation, which there’s likely a need for deflation for a while given the rampant inflation over the last two years.
The resulting inflation measured by the consumer price index (CPI) has cooled some from the peak of +9.1% in June 2022 but remains hot at +6.4% in January 2023 over the last year, which remains at a 40-year high (highest since July 1982) along with other key measures of inflation (see figure below). After adjusting total earnings in the private sector for CPI inflation, real total earnings are up by only +2.2% 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. The figure below (h/t David Boaz at Cato Institute) shows how this problem is from both Republicans and Democrats.
As the federal debt far exceeds U.S. GDP, and President Biden proposed an irresponsible FY23 budget and Congress never passed one until the ridiculous $1.7 trillion omnibus in December, 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 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. Of course, part of this includes the Great Recession and the Shutdown Recession, so these periods would have likely been good reason to exceed the limit, but regardless we would be in a much better fiscal and economic situation with this fiscal rule. 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: While there appears to be a strengthening labor market in January, let’s see if this continues as my guess is that these were biased from the data adjustments, and we will see a weaker labor market in the months to come. My expectation is that stagflation will continue along with the a deeper recession this year given the “zombie economy” with “zombie labor” of many workers sitting on the sidelines and others are “quiet quitting” along with the failures of many “zombie firms” that live on debt. Ultimately, Americans are struggling from bad policies out of D.C.. Instead of passing massive spending bills, 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.
Vance Ginn, Ph.D.