It’s time to talk about the R-word.
“Economy shrinks 1.4 percent in first 3 months of year, raising recession fear,” says a Washington Post headline. Two consecutive quarters of decline in gross domestic products is a recession. The Post‘s normally judicious Catherine Rampell all but predicts we’ll record a second quarter of decline three months from now, noting that “historically, most of the times the Fed has raised interest rates to get inflation under control, it (accidentally) tipped the economy into recession.” Deutsche Bank predicts “a significant recession by late 2023.” Such an outcome would pose a mortal threat to Democrats in the midterms, the 2024 presidential election, or both.
But none of these predictions reflect the consensus view. While a recession is possible, it’s not more probable than an increase in economic growth over the second quarter, i.e. April, May and June. The economy is still characterized as a Covid one. Covid-19 is mostly receding as a health threat in the United States. It’s still a health threat in the United States, though it is still thriving across China and other parts of the world. economy.
We’ve never had a Covid economy before, which is why just about every economic prediction you heard over the past 26 months (including, ahem, some of mine) turned out more wrong than economic predictions usually are. Diverse indicators point in very different directions.
Gross domestic product, which soared by 6.9 percent in the last quarter of 2021, was never going to expand at that rate in the first quarter of 2022, but not a lot of people expected it to fall by 1.4 percent, as the Commerce Department announced Thursday. Nobody expected this because (a) the Fed, during the first three months of 2022, didn’t raise interest rates (the first increase since 2018 wasn’t even announced until March 17); and (b) consumer spending, which accounts for the bulk of GDP, rose crazily.
After the GDP news broke, we found out that consumer spending has been rising even faster than we thought. Personal consumption rose in March by 1.1 percent in nominal dollars and 0.2 percent after inflation, with inflation calculated conservatively in “chained” 2012 dollars. In February, Commerce reported last month, personal consumption rose 0.2 percent, but on Friday that was revised upward to 0.6 percent (0.1 percent after inflation). Commerce reported that Americans spend more than what they earn. In March, disposable income fell by 0.4% after the inflation rate, while consumer spending rose by 0.2 percent.
What were we spending our money on? Services were the most affected by the Covid epidemic. This is because you interact with contagious people when eating out or on planes to Paris. Spending on services didn’t return to pre-Covid levels until June 2021, and it’s been rising briskly ever since, led in March by international travel (as anybody who’s purchased an international plane ticket recently may have noticed).
Spending on the purchase of manufactured products is a more complicated story. Because of ongoing supply chain issues abroad, spending on durable goods like cars fell. However, spending on nondurable goods such as gasoline increased due to the war in Ukraine. Consumer spending on gasoline has risen nearly 18 percent since January, a period during which the price of gasoline rose about 27 percent. Economists refer to this as “inelastic” demand. When gasoline prices rise, consumers spend more on gasoline 15 than they did in January. This was despite the fact that gas prices have risen by approximately percent.
Another factor is the cost of hiring. The Labor Department on Friday released the employment cost index, or ECI, for the first quarter of 2022, and, as expected, it was high. Because it considers both wages as well as benefits, the ECI gives you an idea of what it will cost for a company to hire someone. From January through March of this year, the ECI rose 1.4 percent over the fourth quarter of 2021, with wages rising 1.2 percent and benefits rising 1.8 percent.
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Over the past 12 months, the ECI has risen 4.5 percent, with wages rising 4.7 percent and benefits rising 4.1 percent. That would be a lot if inflation hadn’t risen by 8.5 percent during the same period. But it did, so in real terms the cost of hiring someone actually fell, even as corporate profits in 2021 rose 25 percent before taxes and 37 percent after taxes. Pretax corporate profits haven’t risen that fast since 1976, Fortune‘s Will Daniel reported last month, and after-tax corporate profits have never risen that fast since the Federal Reserve started the current data series in 1948.
You can see why people are having a hard time figuring out what’s going on. The corporate profits have increased while the GDP has fallen. Consumption is rising, but disposable income and real wage growth are decreasing. Although it’s now more costly to hire people than ever before Milton Berle was Mr. Television, corporations still have the money. The U.S. has gone sour because of Covid.
Even before the May GDP report, Harvard economist Larry Summers was predicting a return to 1970s-style stagflation, a prediction that last month I called “pretty nuts.” It looks only slightly less nuts now. “Notwithstanding the first-quarter GDP number,” writes Alan Blinder, a very wise Princeton economist who was vice chairman of the Fed in the mid-1990s, “the Fed is trying to steer a basically healthy economy.” Will we get a recession? Blinder writes, “Maybe.” “But it’s important to note that any recession shouldn’t be deep and long, in contrast with those of the 1970s and early 1980s.” And there’s a decent chance we won’t have a recession at all.
In the meantime, you might consider going a little crazy with your credit card. While inflation is an issue for Democrats, a recession, even mildly Blinderesque, could be much worse. Take that Costa Rica trip even though you don’t have the money. Even though you don’t have the disposable income and your salary isn’t growing with inflation, take it. If you are employed in non-union shops, as you probably do, you should consider organizing. You boss has a huge amount of money and it is his patriotic duty spend more on your employees.