Total employment in 1970 was 77M. 4% of that market, 2.8M jobs, essentially disappeared in the next 50 years.
Elevator operators: 1K.
Blast/powder operators: 7K.
Porters, bellhops: 14K.
Auctioneers, hucksters: 12K.
Riveters, blacksmiths, furnaces, forgers, shipfitters: 65K.
Fishers: 74K.
Rail Workers: 216K.
Printers, typsetters, book publishers and news delivery boys: 261K.
File clerks, office machine operators, typists, keypunchers: 2,162K.
It’s time to revisit the state of the US economy. The media and stock market are overreacting to the positive news today that the US economy added about 250,000 jobs in September. Pundits and investors deem this as a “too hot” labor market which will drive higher inflation and force the Federal Reserve Board to further increase interest rates to slow the economy. We need to look at history, components of the economy and specific measures carefully to evaluate our position.
In a nutshell, the US Congress and President spent so much to offset the pandemic that we have classic inflation from higher demand and lower supply. At the same time, the Fed increased the money supply and lowered interest rates to zero to ensure that the banking sector did not provide a “credit crunch” to businesses or households. Foreign governments and banks acted similarly. This allowed the world economy to work through the pandemic with minor negative effects. However, the boost to the economy was too much and governments and central bankers were slow to reduce the stimulus they provided. The world was tightly focused on “recovering” to the pre-pandemic GDP and employment levels during 2021, so major changes in government spending and the money supply were not implemented until near the end of 2021. By the start of 2022, it was clear that growth was unsustainable and inflation was rising quickly, so policy makers needed to adjust. They have now done so and the impacts can be seen. So far, the economy is slowing, official recession or not, to low/zero growth and looks to remain at that level through the end of 2022 with low/slow growth expected in the first half of 2023.
We can call this a “soft landing”. We can call this a “growth recession”. We can call this a “recession” or a “recessionette”. There is no evidence of a “major recession” with 2% GDP declines or 3% unemployment rate increases or “50% declines” in housing starts or bank lending freezes or massive industry balances to liquidate or … Inflation is high and seems to have peaked. It is not coming down as quickly as most experts (or me) predicted during the first half of 2022, but many factors indicate that we are not in a self-perpetuating inflationary spiral.
With the benefit of hindsight, real GDP growth during 2018-19 was somewhat above trend and unsustainable. A 2% excess output doesn’t seem like much, but it does matter. The economy at the end of 2021 was in roughly the same place with 3.5% style unemployment. 4Q, 2021 was more than $1 trillion higher (5%) than 4Q, 2020. 5% real annual economic growth is very rare for a large, modern, developed economy. This was after the immediate pandemic bounce. The 3rd and 4th quarters of 2022 are likely to be reported as essentially flat with the 2nd quarter. Consensus forecast is near zero growth in the first half of 2023, returning to 2-3% growth in the second half.
https://seekingalpha.com/article/4514734-soft-landing-in-economics
https://www.npr.org/2022/07/24/1112770581/inflation-recession-soft-landing-rates-jobs-fed
https://www.cnn.com/2022/09/26/investing/premarket-stocks-trading
Federal spending added $2 trillion to aggregate demand in each of the first two pandemic years. In retrospect, too much extra demand.
US government budget deficit will be $2 trillion lower in the fiscal year ending September, 2022. This is good news. The “excess” spending was capped more than one year ago, so the trend rate is part of the current core economy. “Excess government spending” is not driving inflation today. It contributed to the inflationary build-up during 2021 into the first half of 2022 (economic stimulus works with a lag effect).
The increased money in consumers’ pockets lead to a 30% increase in purchases of durable goods. Consumers had money. They were afraid to consume in-person services. They bought stuff. They’re still buying stuff. The transition from buying goods to buying services has been slower than expected. This has led to extended supply chain disruptions (globally), higher demand for many commodities and increased goods prices which feed higher inflation and higher demand for labor. The total demand for durable goods has flattened and prices have stopped increasing. This is a much-improved situation from late 2021.
Consumers did save some of their extra earnings during 2020 and the first half of 2021, but as prices increased and services became available, consumers chose to spend more and reduce their savings rate down to just 4% of income, well below the 7-8% of the prior expansion period. So, part of the “excess demand” in late 2021 was the drawdown of savings. That cannot happen again. It’s possible that low consumer confidence will reduce spending in the next year, but flat spending is more likely.
Most business cycle recessions show a clear build-up and subsequent liquidation of business inventories. Inventories were reduced (involuntarily) in the recovery from the pandemic and have increased a bit since then. There is no current indication of a pending “inventory recession”. In a “zero growth” retail holiday sales season, there will be some eternally optimistic retailers that have to cut prices to move goods, but this happens nearly every year.
The Fed increased the money supply by an historically unprecedented 25% in response to the pandemic. And then by another 10% during 2021. In hindsight, the 25% was too much and the extra 10% was irresponsible. Fortunately, the money supply growth ended by the fourth quarter of 2021 and has remained flat.
Mortgage rates were held to less than 3% for 2 years to support the recovering economy. They have now more than doubled, in excess of 6%. These higher interest rates will slow economic activity in many dimensions: lending, home buying, consumer credit, consumer spending, business investment, risk taking, stock prices, etc. Higher interest rates work with a lag to slow economic activity. They were still at “crazy low” rates at the end of 2021. The impact of higher rates is now being felt.
With extra savings, higher earnings, lower unemployment, restricted services available and historically low mortgage rates, consumer demand for housing grew rapidly while supply increased marginally. Housing prices (and rents) grew by 30%. Demand has now slowed. Housing inflation has slowed, perhaps to zero. This is a major channel through which GDP is decreased and inflation is reduced. Home purchases usually trigger thousands of dollars of additional move-in and fix-up expenditures.
Housing sales and new housing starts have adjusted to the new interest rate environment. Note that the level of new housing starts remains above the pre-pandemic level, so some further decline is possible in the second half of 2022.
The US and global stock markets very quickly rebounded from the initial pandemic fear levels (-25%) back to the pre-pandemic levels which were more than 10% above the 2018-19 trend line. Stock markets increased after the initial pandemic recovery by 50% in line with growing profits. They have since dropped by one-quarter, a combination of lower expected future profits and higher interest rates increasing corporate financing costs and the cost of equity investors’ funds. Lower stock market prices usually have a negative “wealth” effect, with nominally poorer investors spending less in the current economy.
By the second quarter of 2021 we started to see 7-10% annual inflation rates. Increases finally slowed (or stopped) in the last 2 months. Reported inflation on a 12 months apart basis will remain above the 2% target level for the next 9 months, as high monthly inflation during the end of 2021 and the first half of 2022 remains in the measurements. Experts have a wide range of inflation forecasts for the first half of 2023, ranging from 3% to 8%. Most expect inflation to be close to the 2% target by the second half of 2023.
Producer price increases followed the same general pattern as consumer prices. They appear to have reached their peak. Producer prices better reflect global prices, especially the higher price of most commodities. Note the 30% increase in US demand for durable goods.
Global energy prices played a significant role in recent inflation. The last few months displayed an easing of prices, but recent OPEC+ decisions to reduce output indicate oil prices rising some again.
Nominal wages accelerated during 2022, perhaps peaking at 7% annual growth.
Yet, real wages have been falling for 2 years. We do not have a 1960’s style wage-price spiral.
Job openings were at a historical high before the pandemic and quickly returned to that level by the end of 2020 and then nearly doubled in the next year+ as businesses saw opportunities to profit from the expanding economy, but could not find workers at the somewhat elevated prevailing wage rates. The number of unfilled jobs has dropped by nearly 2 million recently, from 12 to 10 million. The labor market is returning towards “normal”, but with 10 million open positions, the number of net new positions added is likely to increase throughout the fourth quarter, even as the Fed attempts to slow the overall economy.
The US labor force participation rate slid from 67% to 66% to 63% from 2000 to 2009 to 2015. It dropped by 1.5% due to the pandemic (61.5%) and has since partially recovered to 62.3%, still a full 1% below the recent peak rate just before the pandemic. The labor market recovery has been good, but not great.
The core, 25-54 year old labor force participation rate has increased by 1.5% since the pandemic to more than 82.5%, less than one-half percent below the recent high of 83% before the pandemic. By this measure, the labor market is recovering nicely, but not completely.
Retirement age workers have not returned to the work force, with more than 1.5% of potential workers choosing to not join the labor market. Employers will need to be more innovative to attract workers back into the labor market.
The economy is slowing down, inflationary pressures are easing, but the labor market still looks strong. Slow to zero growth for the prior (3rd) and next 3 quarters is likely as inflation falls from 7-8% to 2-4%. Unemployment rates may increase, but it appears that the total number of employees will increase slowly during this low/zero growth period.
https://abc13.com/houston-we-have-a-problem-weve-had-remember-when-history/1869513/
US Corporate profits grew from $1.9 Trillion(T) on an annual basis in the second quarter of 2019 before the pandemic to $3.0T in the second quarter of 2022; plus $1.1T (+57%)!!! US nominal gross domestic product (GDP) grew by 17%, from $21.3T to $24.9T, an increase of $3.6T. Real, inflation-adjusted, GDP grew by just 4%, accounting for a $0.8T increase in the real economy. Inflation grew by 13%, causing the other $2.8T of measured GDP. The $1.1T of increased corporate profits represents 39% of the inflation which has occurred in the last 3 years.
Let’s look at the growth of US corporate profits from a half-dozen starting points to try to put this into perspective.
| Year | Profit | Real Profit | Annl Incr Stage | Cum Annl Incr |
|---|---|---|---|---|
| 1970 | 55 | 142 | ||
| 1980 | 273 | 271 | 7% | 6.7% |
| 1995 | 468 | 307 | 1% | 3.1% |
| 2006 | 1,388 | 628 | 8% | 4.5% |
| 2012 | 1,880 | 819 | 3% | 4.3% |
| 2018 | 1,947 | 775 | -1% | 3.6% |
| 2022 | 3,012 | 1,023 | 7% | 3.9% |
US corporate profits reached $3 Trillion in 2022, up from essentially zero in 1950. I’ve selected 7 peak profit years to outline this growth. Nominal profits increased from $55B in 1970 to $3.0T in 2022. In real, inflation-adjusted terms, profits have grown from $142B to $1,023B, a 7-fold increase in 52 years! Annual profit growth has been erratic, increasing by a high of 8% from 1995 to 2006 and a low of -1% from 2012 to 2018. The cumulative annual real profit growth has stayed near 4% throughout the period. 4% compounded for 52 years is a little more than 7x.
The US population grew from 200.3M to 338.3M during this period, 1.0% per year. So, corporate earnings grew by 3% per year above the rate of population growth for 52 years!!!! This kind of compound growth rate cannot continue for long periods of time without greatly impacting other sectors of the economy.
https://www.macrotrends.net/countries/USA/united-states/population
Corporate profits fluctuated in the 4-6% of GDP range from 1947 through 2000. Profits jumped up to 10% of GDP by 2010 and have largely remained at this two-fold elevated level for a decade. Profits reached a new record of 12% in 2022!
This measure shows profits growing eight-fold since 1970. (I’m going to ignore the detailed differences between the various measures of profit. They are important, but not necessary to see the major growth in profits, which is broadly consistent across the various measures.)
A tighter measure of corporate profits shows an increase from 4.5% to 7% of GDP, even before the most recent profit growth.
An alternate measure of just “domesticly earned” corporate profits shows a flatter trend.
Another way to consider profits is to view its complement, the share of national income received by labor.
By this measure, labor has lost 10% of its income, while capital has gained 10% since 1980.
6% of GDP was moved from labor to capital.
Consulting firm McKinsey shows an 8% of GDP transfer and provides 5 explanations.
Most analyses of the growth in profits and decline in relative wages note that labor productivity has continued to rise by 2% or more annually, but labor has received almost no portion of those gains in the last 30 years.
Labor share of total income has dropped by 15% in the long-run by this measure.
This author calculates a 6-8% decline for labor.
A right-leaning think tank adjusts the data and claims that labor’s share remains constant in the long-run. The Tax Foundation does delve into the various measures of income and provides arguments for their preferred measure.
Stock prices tend to follow profits. The S&P 500 index has grown by 50% in the last 2 years (despite the recent decline), reflecting the amazing growth in corporate profits during a “once in a century” pandemic driven recession.
S&P 500 company earnings (a subset of total profits earned) continued to grow strongly through and after the pandemic.
This investment advisor says that profits increased by 5% of GDP.
Median REAL, inflation-adjusted, earnings remained flat at $330/week from 1979 through 2014, a period of 35 years! This is during periods where profits were growing at 4% per year in REAL terms. In the last 8 years, REAL wages have increased by 9%, a bit better than 1% per year on average.
The media has published many articles, especially noting the increase of profits, overall, since before the pandemic. This is a popular topic because the result is certainly counterintuitive and because President Biden and the more left-leaning national Democrats have been criticizing corporations for “price gauging” and causing the recent inflation spike.
https://www.cbsnews.com/news/corporate-profits-boom-may-lead-to-higher-wages/
A variety of sources provide compelling data and logic to indicate that corporations are “taking advantage of” the post-pandemic inflation caused by supply chain issues and expansive fiscal and monetary policies to boost prices at rates faster than their costs of inputs (suppliers, labor, capital).
https://abcnews.go.com/US/record-corporate-profits-driving-inflation/story?id=87121327
Most economists and analysts point to the increased concentration of firms (fewer) by industry increasing their pricing power and allowing them to raise prices during periods of change.
https://academic.oup.com/rof/article/23/4/697/5477414
https://www.uschamber.com/finance/antitrust/industrial-concentration-in-the-united-states-2002-2017
This is pretty dense and dry stuff. There is a general consensus among economists who focus on this topic that concentration and pricing power have risen very significantly. This is partly due to the simple aging of industries with fewer players left standing. The winners in a world of global competition are simply “much better” than the losers so they continue to take market share. US anti-trust enforcement in the last 40 years has been very limited, following the theory that “open competition” in the long run (Schumpeter’s creative destruction) eventually undermines leading companies with innovative products, processes and market strategies.
The US Chamber of Commerce argues that industry concentration has not increased, noting that consumer choices in broadly defined industries have increased greatly through time.
https://www.uschamber.com/finance/antitrust/industrial-concentration-in-the-united-states-2002-2017
By a dozen measures, profit has consistently grown as a share of the American economy in the last 40-50 years. This necessarily means that the share of output and income received by labor is much smaller as a percentage of the total pie. The recent surprising ability of American corporations to effectively work through the pandemic supply chain disruptions, lose more than 10% of their labor force, increase nominal wages significantly, encounter severe input price inflation and still engineer price increases to come out much further ahead on profits is a major story for our time.
It is attracting attention to what I believe is an even more important story: the ability of corporations to incrementally capture nearly all of the increased value added by the productive American economy across 40-50 years and share very little with labor. This structural advantage of a very effective corporate sector “doing its job” within the relatively low-tax and low-regulation US political context is now completely proven.
In an ideal world, we would be developing and considering serious policy options that would limit this excess power without “killing the goose that lays the golden eggs”. Unfortunately, the Republican party remains focused on tax and regulation cuts as the main economic tools and the Democratic party alternates between 1960-70’s era Biden “centrist” policies and much further-left Bernie Sanders style policies.
US labor force employment grows and grows. 60M employed in the very glorious 1950’s. 80M by the end of the dynamic 1960’s. 100M by the end of the transforming 1970’s. 120M by the end of the conforming 1980’s. Not quite 140M by the turn of the millennium (2M shy). Just 140M at the end of the “oughts” decade. 158M before the pandemic, resuming the 20M new jobs per decade record of the sixties, seventies, eighties and nineties in the teens decade.
That is 100 million net new jobs added in my lifetime. 160M, up from 60M.
We have two sources, a payroll survey and a household survey. They both tell the same story.
A once in a century pandemic? No problem. 27 months later, total employment has been recovered, despite a 20M worker decline! Set aside politics. This is an amazing result for the US labor market, businesses and citizens.
US economy continues to add about 400,000 jobs each month. This is almost 5M jobs per year, more than twice as fast as the usual 2M jobs per year in recent history.
The labor force participation rate for prime aged individuals (25-54) increased from 65% to 84% between 1950 and 1990 as women were accepted into the labor force. 84% was maintained for a decade and 83% for the next decade. The teens decade saw a decline to 81%. The market has remained in the 81-82% participation rate range.
New hires averaged 5M per month in the slower growth “oughts”. New hires dropped further to just 4M per month after the Great Recession. New hires slowly built up to a new record level of 6M per month before the pandemic arrived. The pandemic had just a minor impact on new hires, with a record 6.5M new employees being hired each month in late 2021 and 2022.
Voluntary quits averaged 2%, 1 in 50 employees, during the first decade of the 21st century. Quits dropped sharply to just 1.4%, just 1 in 70 employees, in the 3 years afterwards. The quit rate slowly returned to “normal” by 2016 and climbed further to 2.3% as the economic recovery continued for a full decade.
By October, 2021 quits had returned to the solid pre-pandemic rate of 2.3%. The quit rate jumped up to 2.8% by April, 2021 and has remained at this historically high rate.
Job openings averaged 4M before the Great Recession. They dropped below 3M during 2009-13. They increased to 5M in 2014 and to 6M by 2016. They remained at the 6M level during 2017, before climbing to 7M for 2018-19. By Jan, 2021 job openings had recovered to 7.2M. By October, job openings had increased to a historic 11M and have remained at this unprecedented level.
This is a greater than 50% increase in open positions since before the pandemic, just 29 months ago. This is 120% more than the peak level before the Great Recession.
Profit maximizing businesses, managers and HR departments work through internal processes to list/post a job opening only when:
11M job openings means that firms believe that they can generate material incremental profits by hiring up to 11M new employees.
11M open jobs is a startling number, but the ratio of unemployed persons to open positions is much more important. The Great Recession created a 6 applicants per job market. This declined to 2:1 in 2014. During the historic extended expansion it declined to just below 1:1, an unprecedented low number. The ratio fell below 1:1 in 2021 to the current 0.5 level. Two open positions for every unemployed job seeker.
Unemployment was quickly driven to the pre-pandemic record low of 3.5% this summer. Unemployment was below its usual minimum of 5% for 5 years just before the pandemic, leading most economists to recalibrate the “non-accelerating inflation rate of unemployment” (NAIRU) down to 4% or slightly below. This is a very efficient labor market.
Real (inflation-adjusted) wages have reflected this labor market situation. They remained at the $335/week level from 2000 through 2014, reflecting the slow growth of employment and GDP. Wages began to raise in real terms in 2015, reaching $360 by 2019, a 7.5% real increase. Wages were growing rapidly just before the pandemic and climbed to $390/week in the second quarter of 2020, an additional 8% increase in a few months. Real wages have since declined back to the $360 per week level as high inflation has offset higher than usual nominal wage increases. Firms have chosen to live with 11 million open positions rather than increase real wages.
Firms have 11M open positions that they believe will help them to make greater profits. Real wages are the same as they were just before the pandemic started. Firms have chosen to not increase hiring and regular wages any faster because they judge that this will cost them more profits than allowing 11M positions to remain unfilled. This is the first time in at least 50 years that firms have had to manage a labor market where employees and applicants have some market power. Despite this “standoff” in the labor market, total employment is back to the pre-pandemic level, firms are hiring record numbers of employees and labor force participation is recovering towards the pre-pandemic level, which was at a 10-year high. The overall economy has clearly slowed its growth rate to near zero, but the labor market remains in a very positive state for workers.
Trump has revolutionized modern American politics. The Reagan revolution consolidated conservative voters, clearly aligning them with the Republican party. The Gingrich revolution further separated the two parties, emphasizing winning and party allegiance. Republican candidates and voters engaged in a reinforcing cycle of “purist” policy aims such as no tax increases, “drill baby drill” environmentalism, banning abortions, and “bomb baby bomb” anti-terrorism. The Great Recession and the tea party further motivated populist leaning voters to demand populist policies and appeals. Trump modified many historical Main Street and Wall Street Republican policies to make the party better embrace the populist mood and “make American great again”.
Trump’s “only results matter” approach has further transformed the party and the nation. His presidency delivered some key political accomplishments. It also produced many “results” that will shape American politics, economics, society and debate for years to come.
https://www.bbc.com/news/world-us-canada-37982000
https://www.politifact.com/truth-o-meter/promises/trumpometer/
https://trumpwhitehouse.archives.gov/trump-administration-accomplishments/
https://www.vox.com/policy-and-politics/2019/12/2/20970521/trump-administration-achievements
https://www.propublica.org/article/the-government-donald-trump-left-behind
https://www.mcleancountyrepublicans.org/trump_administration_accomplishments
https://www.washingtonpost.com/outlook/2021/01/20/trump-legacy/
https://apnews.com/article/fact-check-donald-trump-farewell-remarks-f911b5ea84a2b69291aa6f52b9ef6318
https://www.barnesandnoble.com/w/trump-got-it-done-jack-t-adams/1139526046
https://www.thedailybeast.com/even-liberals-have-to-admit-trump-had-real-successes-on-the-economy
https://www.cbsnews.com/news/trump-view-historians/
https://www.belfercenter.org/publication/trump-legacy-and-its-consequences
https://www.cnn.com/2021/08/30/politics/trump-legacy-fake-news/index.html
https://www.cfr.org/article/donald-trumps-costly-legacy
https://www.pbs.org/newshour/show/what-will-trumps-legacy-be-after-leaving-office
https://www.yahoo.com/video/what-is-president-trumps-legacy-203123599.html
Trust in the Department of Justice (DOJ), overall, has been relatively flat. Republican support has increased while Democratic support has dropped.
Historically, Republicans have been conservative, supporting the police, military, FBI, defense, “law and order”, criminal justice and “black and white” law enforcement. While the DOJ and some other federal agencies have been staffed by left-leaning coastal elites, the FBI has been staffed by more conservative leaning individuals.
https://www.politico.com/story/2016/11/fbi-donald-trump-base-230755
Different survey questions produced different results, but the FBI is one of the most respected federal agencies.
The Republican versus Democratic split widened.
https://www.vox.com/latest-news/2018/2/3/16968372/trump-fbi-republican-poll-confidence
https://www.politico.com/story/2018/02/03/conservatives-fbi-trump-republicans-389076
Huge 10% drop in the middle of George W Bush’s presidency. 5 institutions with 10% or greater drops in support.
Widespread further decline in support of “institutions” during the pandemic.
The broad decline continues in 2022. Can it continue?
538 has a similar article but refuses to link directly. Worth your time to query and copy.
“What Happens When Americans Don’t Trust Institutions?”
If only one-quarter of Americans trust in its basic institutions, how can we have democracy and capitalism and “western civilization”? If “everything is broken”, then we need a dictator or a revolution. Really? Really? Really?
I have to blame the 16 year-old me for some of this. In 1972, we were all opposed to “the man”, “the organization man”, “the establishment”, etc. We were children of the hard-won victory of democracy and capitalism against fascism and imperialism and communism. We believed in progress, science, growth and possibilities. We were skeptical about the Vietnam war, the military, McNamara and his whiz kids, General Curtis LeMay, big corporations, compromises, limitations, bureaucracy, bigness (small is beautiful), population growth, technology, etc. Many of us deeply believed in a romantic idealism or utopianism, making stodgy historical institutions so irrelevant.
Fast forward 50 years and I (we) possess a fundamentally conservative view, embracing the need/value of institutions and channeling our inner Edmund Burke to emphasize the value of the accumulated wisdom of society.
https://en.wikipedia.org/wiki/Edmund_Burke
So, the overall decline in trust of American institutions is a real challenge. The decline in trust in the FBI is clearly (IMHO) a Trump driven result. This, too, is a real challenge to our democracy. Do we (I) really believe that the leadership and staff of the FBI have abandoned their democratic principles which we have lived and supported for almost 250 years? I don’t think so. But the decline in trust/belief in all institutions combined with the increasingly politically polarized view of individual institutions makes this a reasonable view for many of our fellow citizens. We have much, much work to do in order to preserve our institutions, government and society.
Presidential candidate Ronald Reagan skewered the incumbent Jimmy Carter in the 1980 presidential debate with this question and framing of economic issues.
We are economically better off today than we were in 2019, 2016, 2012 or 2008. As a nation, we need to recognize the strong economy that has been built across several 4-year periods.
Let’s focus on just 2 measures: unemployment and real gross domestic product (GDP).
The US encountered its worst or “tied for worst” economic downturn in almost a century in 2008-9 with the Great Recession.
The economic recovery was relatively slow, but the economic expansion continued for a RECORD 10 years! This was followed by the pandemic recession which drove unemployment up to 15% in a mere 3 months!! In 2 years, with a never before encountered global pandemic raging and evolving, the US unemployment rate dropped from 15% back to 3.6%!!! It has since levelled off at 3.6%, just shy of the 3.5% rate before the pandemic. This is an AMAZING outcome for the economy and our citizens
Since WWII (1947), the real, inflation adjusted, “no fooling”, GDP of the US has increased TEN-FOLD! We can honor the “greatest generation” and the country’s sacrifices to win WWII, but the economy in the 1940’s was less than 10% of the size that it is today. This is a true “order of magnitude” change. The economy has rotated from agriculture to manufacturing to services and trade.
The real economy is THREE TIMES as large as it was when Reagan was debating Carter in 1980.
It is 25% higher in 2022 than it was in 2008, despite two major recessions.
Unemployment measures the available labor capacity that is unused. The Depression saw extended periods of 20% unemployment. The post-war period enjoyed low 4% level unemployment through 1957. The next 7 years were above 5%, setting a new expectation of what the reasonable, long-term, natural, non-accelerating inflation rate of unemployment (NAIRU) was. The next 6 years of Vietnam and social welfare spending drove a 4% average unemployment rate which most economists believed was unsustainable and which eventually drove significant increases in inflation. The 1970 recession drove unemployment above 5% where it stayed for nearly 30 years, before finally starting with a 4 in 1997. Unemployment remained below 5% for 3 years, touching a 4% low before the millennium recession. Unemployment then averaged a sustainable 5%+ for the next 6 years, reaching a low of 4.5%.
So, when unemployment rocketed up to 10% in the Great Recession, no mainstream economist expected it to return to less than 4% soon, maybe never. Unemployment eventually reached 5.0% by the end of 2015. Professional economists were sure that it had reached its bottom. But Mr. Market, Dr. Copper and Senor Economy had news for the pundits. Consistently through the next 4 years, unemployment declined another 30% from 5.0% to 3.5% without triggering increased inflation.
The subsequent reduction of unemployment from 15% to 3.6% in 2 years is an incredible result reflecting a robust economy.
Next, let’s turn to a set of global comparisons to gauge if we are “better off”.
US, China, Japan, Germany, UK, India, France, Italy, Canada, S Korea, Russia and Brazil provide the framework for evaluating global economic results today.
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=JP-DE-BR
India, France, Italy and Brazil are saddled with 7% unemployment rates, double the US level. Canada and China encounter 5% unemployment. The UK, South Korea and Russia enjoy below 4% unemployment rates with the US. Japan and Germany glory in sub-3% rates. The 12 country average is 5.3%, almost 2 points above the US 3.6% rate.
The most recent 9.1% annualized US inflation rate is above the 7.7% average. Russia and Brazil are struggling with 10%+ inflation. Canada, Italy, India, UK and Germany face 6-7% inflation. France and South Korea encounter 5% inflation. Japan and China see just 2% inflation.
Combining the unemployment rate and inflation rates to create a “misery index”, the US scores 12.7%, just above the 12.2% average.
At 24% of global GDP, it is first. China and Japan together add up to 24%. The remaining 9 large countries add up to just less than 24%. Being large provides the advantage of a larger domestic market that attracts investors, entrepreneurs, researchers, supplier, labor, traders, etc. On the other hand, continuing to grow in the same percentage terms through history or compared with smaller countries as the largest economy is a handicap. (This is a great graphic worth exploring for a few minutes)
US reports $63,200 per year. Germany, Canada, UK, Japan and France range from $39K – $46K, roughly two-thirds of the US level. Italy and South Korea check-in at $32K, about one-half of the US level. China and Russia earn $10K annually, while Brazil ($7K) and India ($2K) lag further behind.
https://www.investopedia.com/insights/worlds-top-economies/
GDP figures are not widely available for the first half of 2022 for countries, so we can use the pre-pandemic 2019 compared with the late pandemic 2021 to gauge recent economic performance.
The US GDP in 2021 was 8% higher than in record breaking 2019. It increased by $1.63 trillion in 2 years. Global GDP in 2021 was $90T. US GDP grew from $21.37 to 23.0 trillion.
China (factory to the world), in a period when demand for durable goods increased by 20% and nondurable goods by more than 10%, grew even faster, from $14.3 to 17.7 trillion, an increase of $3.4 trillion. I believe this is overstated somehow, given other data that indicates 6-7% annual growth in China each year, but it’s first place two-year ranking is clear.
The other 10 major economies combined grew from $26.4 to $27.7 trillion, an increase of $1.3 trillion, totaling less than the US $1.6 trillion growth. Their 5% combined growth rate trails the US 8% growth rate.
In percentage terms, the UK, India and Canada grew by 10% or more. Germany, France and South Korea grew by 8-9%. Russia and Italy grew by 5%. Japan and Brazil endured economic declines.
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=JP-DE-BR
From the end of 2012 through July, 2022, almost 10 years, the US Standard & Poor’s stock index gained 175%. Fast growing India and previously undervalued Japan reported the same kind of amazing 10 year returns, compounding at more than 11% annually. Germany, France and Brazil grew by a decent 75%. Resource based Canadian and previously overvalued Chinese stocks gained a modest 50%. The UK, Italy and South Korea edged up by 25%, while Russia dropped by 25%.
Stock market returns reflect relative initial evaluations, changes in investor preferences, terms of trade and the underlying profitability/sustainability of each country’s economy. By this measure, the US has a very bright future.
Comparing July, 2022 with a pre-pandemic base of December 31, 2019 shows a 25% gain for the US, Japan and India, even with the 20%ish stock market declines in the first half of 2022. Canada and South Korean markets are up a respectable 10%. China and France report a modest 5% gain. Germany and the UK show no gain. Italy, Russia and Brazil are in the 10% loss range. Even with strong gains from 2012 through 2019, the US stock market lead the world through the pandemic recovery period.
US inflation has returned to threatening levels and consumer confidence has fallen sharply while confidence in the incumbent president has continued to decline. The current “mood” is negative despite many positive economic factors such as the labor market and growth in GDP, housing and stock values. We are having journalistic, academic and partisan debates about hanging the “recession” label on the economy.
Big picture, the US economy is in great shape. It continues to grow, employ labor, increase wages, export, generate profits and build asset values. The economy worked through a “once in 100 years” global pandemic, with limited long-term economic damage.
There is a risk of a recession, even a moderately painful 3-5% downturn. There is a risk that inflation will remain elevated for more than 1 year, reducing the value of wages and assets. But these are normal business cycle issues, not the “end of the world”. The responses of consumers, investors, suppliers, businesses, bankers, central bankers, regulators and … politicians to the last two recessions were constructive and helpful. We have the ability to work through our current economic headwinds if we choose to do so.
I tried to find a “mainstream media” article that objectively and insightfully evaluates the state of the US economy as of the end of the second quarter without success. So, I’ll take a shot at it.
First, I want to highlight that “this time, it’s different”. The US and global economies are recovering from a global pandemic situation last seen more than 100 years ago. The global economy is more integrated than ever. Viruses spread faster than ever. Businesses and governments have more information and ability to change quickly than ever before. The economic contraction was sharp, far more severe than the Great Depression or the Great Recession. The health care experts were unable to immediately evaluate the threat or recommend public policies. Nonetheless, “they persisted” and the medical, travel and economic recovery was far quicker than ANYONE expected in March, 2020 or December, 2020 or September, 2021 or January, 2022.
Second, I apologize for the required details involved to evaluate the simple question, “are we in a recession?”. Unfortunately, there is some judgment involved, as we have to evaluate three factors. Is there a clear downturn versus the trend rate? Is the downturn of significant length? Is this a widespread downturn, effecting most sectors of the economy?
Einstein said “be simple, but not too simple”.
https://wiki.c2.com/?EinsteinPrinciple
Sir Walter Scott noted the “tangled web we weave”.
https://nosweatshakespeare.com/quotes/famous/oh-what-a-tangled-web-we-weave/
The Ancient Greeks noted “many a slip twixt cup and lip”.
Cheech and Chong rambled on with ” recession, repression …”
https://www.lyricsfreak.com/c/cheech+chong/santa+clause+and+his+old+lady_20745568.html
At the aggregate level, we clearly have a peak. Do we have an extended downturn? Not yet, based on the total. The rapid recovery from the second quarter 2020 bottom could not be sustained. A significant slow-down in the growth rate was expected. Typical annual real GDP growth in recent years has been only 2%, so the difference between “extended expansion” and “recession” is thin.
Macroeconomic theory focuses on aggregate demand and aggregate supply. Real, inflation adjusted, gross domestic product (GDP) is a measure of the productive output of a nation. The demand side is split into consumption, investment, government and net exports. I’ll go one level deeper, reviewing 9 components of GDP.
The business cycle is influenced by the relative sizes of the components of GDP and their relative variability from quarter to quarter and typical changes as the business cycle moves from expansion to decline to recovery.
From most to least correlated with the business cycle, with their current percentage share of GDP (sums to more than 100 because imports are a negative factor and changes in private investment can be negative), the 9 components are: Change in private inventories (1%), Residential Investment/Housing (5%), Business Investment (14%), Durable Goods Consumption (9%), Imports (16%), Non-durable Goods (food, energy) (15%), Services (45%) !!!!, Exports (8%) and Government (17%).
Overall, I see 4 sectors as “maybe” trending to a recession and 5 sectors currently at “no”. Unfortunately, the two most sensitive, Housing and Business Inventories, are in the “maybe” category, along with non-durable goods consumption and government consumption.
It is critical to look at the longer-term trends and context to evaluate short-term changes. There is significant month-to-month and quarter-to-quarter variability in the final numbers for GDP and especially for the initial estimates, like those we just saw for the second quarter of 2022. Significant revisions are made for 6 months, which is why the NBER committee which officially declares recessions is typically waiting longer to make a final call than everyone desires. Hence, I won’t usually share a long-term graph, a short-term graph, annual percentage changes and quarterly percentage changes annualized for each component. The media tends to focus on the preliminary quarterly percentage change annualized as the “gospel”. This is unwise. Let us begin to review the 9 main components.
Durable goods demand spiked by an incredible 20-30% during the pandemic, fueled by government transfers and fewer opportunities to consume services. Demand for durable goods has flattened at this 20% higher level, it has not declined. In my view, this sector is not signaling recession.
Non-durable goods consumption jumped by a real 12% during the pandemic and has essentially remained at this elevated level. We have two quarters at slightly lower consumption levels, so I rate this as “maybe” moving to a recession. Focus on the “big picture”. Both durable and non-durable goods consumption increased by historic percentages during the pandemic period and have remained at that elevated level 2 years later. It is not surprising that this demand has flattened or fallen off a bit. The surprising feature is the willingness of the American consumer to voluntarily spend much more money on “things” during the pandemic and maintain that level of spending as service opportunities returned, government transfers ended, and savings were drawn down.
The very large (44% of GDP) services sector was slower to recover from the pandemic, but demand for services remains quite strong, even though the percentage growth rate is lower than during the initial recovery period.
Business investment was above trend in the two years before the pandemic and has resumed its solid level. No recession indicator here.
New housing investment grew by 50% between 2012 and 2016 and then remained at that level for the next 4 years before the pandemic. Long-run supply and demand factors indicate a “need” for more housing construction in the US to make up for the “missing” construction from 2008-2016. New housing construction did not decline with the pandemic, it increased by 15% in real terms! As with durable and nondurable goods consumption/production, this would not have been predicted in March, 2020 by anyone. Residential construction has levelled off 15% above 2019, equal to 2007 before the Great Recession. The increased mortgage interest rates indicate that demand will soften and this sector will decline somewhat in the second half of 2022, so this is a “maybe”. The long-term shortage of housing supply provides a floor for this sector.
“Supply chain issues” have restricted the accumulation of business inventories since the pandemic began. The unexpected spike in demand for durable and nondurable goods and residential construction lead to shortages. Worries about supply chain resiliency have led to higher targeted business inventory levels. Retailers have overstocked some product categories as the recovery has slowed and are being forced to discount prices to move these goods. Overall, this is a slight “maybe” recession indicator. I think that businesses would like to have 20% higher inventories overall.
US exports continue to solidly recover from the pandemic.
Although imports act as a reduction in the calculation of GDP, they tend to decline when the US economy declines. Import demand remains high, not indicating a recession.
A majority of government spending is accounted for as a simple transfer, not part of the annual production of goods and services.
Government production activity grew quite significantly from 2014 to 2020. It has since declined by less than 1%. I rate this as a “maybe” indicator of recession, even though government activity is typically a countercyclical indicator, rising when recession arrives.
Services (45%), Business Investment (14%), Exports (12%), Imports (16%) and Durable Goods (9%) are NOT in recession. Housing (5%) and Non-durable Goods (15%) point towards recession, while Government (17%) and Business Inventories (1%) show warning signs. If I were a member of the NBER board, I would not designate a recession in the first half of 2022 as of today.
For the second half of 2022, a recession is possible. The Fed raising interest rates is already affecting the housing industry. But businesses continue to report solid to record profits. The stock market has declined by a bear market 20% but may or may not have found a bottom. The global risks from Russia’s attacks on Ukraine and China’s Covid lockdown strategy remain. Consumer confidence is weak, especially in a partisan world. Business confidence is weaker than in recent months, but most measures remain marginally positive. The labor market is at its strongest position in 50 years, supporting consumer demand. Higher than expected inflation has slowed consumer spending, but not to recession levels. Consumer savings and debt levels remain positive. Business debt levels have increased, but most businesses locked in low debt interest rates during 2020-22.
https://en.wikipedia.org/wiki/My_Little_Town
Historically, Ohio was a critical “swing state” in presidential elections.
My “little” hometown of Fairport Harbor is part of Lake County, Ohio which once was the most sensitive county to changing presidential voting patterns after 1952. Lake County is a suburban or exurban county in the Greater Cleveland area. The population doubled from 29K to 60K between 1920 and 1944 while it retained a mixture of agricultural and manufacturing employment. The county grew very rapidly on its western side as Cleveland residents moved away from the city, reaching 149K by 1960. Another 50,000 new residents arrived by 1972, pushing the total above 200K. Growth slowed with the decline of the Cleveland metro area, but the population reached 228K by 2000. The population has been relatively fixed for the last 20 years.
https://wikiless.org/wiki/Lake_County,_Ohio?lang=en
From 1952 through 2008, Lake County voted with the national presidential election winner in all but one of the 15 elections. In 1992, Lake County provided George Bush, Sr with 38% of the vote, the same as he won nationally, but only provided Bill Clinton with 36% of the vote, offering a very high 26% of the vote to “protest candidate” Ross Perot, far above his national 19% share.
https://wikiless.org/wiki/Lake_County,_Ohio?lang=en
https://en.wikipedia.org/wiki/2020_United_States_presidential_election
From 1920 to 1932, Lake County voted 70% Republican, a solid 16% above the national average. Lake County took pride in its role as part of the Connecticut “New Western Reserve” and its road, rail and ship based east to west transportation role at this time. The county was also the proud home of Republican President Garfield.
https://www.whitehouse.gov/about-the-white-house/presidents/james-garfield/
While the country gave FDR 57% of the vote in 1932, Lake County offered just 35%, preferring to re-elect President Hoover.
From 1936 to 1956, the county continued to lean Republican, offering an average of 6% more votes to the Republican head of the ticket than the average state. The county supported FDR in 1936 but opposed him in 1940 and 1944 and opposed Truman in 1948.
The county started its remarkable 14/15 presidential winners string in 1952, supporting Eisenhower by 5 points more than the country at large and repeating this support in 1956.
The county surprisingly supported Kennedy over Nixon 51/49 in 1960, dropping those 5 extra points of Republican support. Kennedy visited the small county during the election. This may have helped shift enough marginal voters.
https://www.jfklibrary.org/asset-viewer/archives/JFKSEN/0912/JFKSEN-0912-002
This was a time of change, with future 20-year congressman Frank Stanton serving as a county commissioner.
https://www.latimes.com/archives/la-xpm-2002-apr-13-me-stanton13-story.html
From 1960 to 2004, the county’s Republican vote percentage matched the national average.
Democrats earned a record high 62% vote share for LBJ in 1964, with Goldwater falling to a stunning 38% Republican low. Lake County “faced east”, looking to the New England/New York and Midwest Republicans (Taft) for inspiration. Goldwater’s Texas, Arizona, California “western” message gained little local traction.
The 1968 election was completely different. Nixon edged Humphrey by 0.8%, with Wallace receiving 14%, as he did nationally. I was just 12 years old, but as a newspaper carrier for 3 years, I had read many editorials from the Cleveland Press, Cleveland Plain Dealer, Lake County News-Herald and Painesville Telegraph. The race riots of 1966-67, Vietnam protests and counterculture demonstrations and activities were beyond the lived experience of my neighbors. Nixon and Agnew leveraged a “patriotic” message to win voters in “my little town”. George Wallace earned a remarkable 14% as a modern populist, promising simple solutions to all of the nation’s problems. I don’t believe that Wallace’s “racist” message was a significant part of his appeal in this heartland. He was an early version of the right-side “anti-establishment” candidate.
In 1972, Nixon cruised to victory by 61/38 against a weak McGovern candidacy. Lake County agreed: 59/38. The “Kent State Riots” were part of this vote. Governor Rhodes was very popular in Ohio, winning 3 terms.
https://en.wikipedia.org/wiki/Jim_Rhodes
https://en.wikipedia.org/wiki/Kent_State_shootings
In 1976, Jimmy Carter sold Lake County on a moderate Democratic platform and his promise to “never lie”, winning 51/46, about the same as the national 50/48.
In the same year, the county’s largest employer, Diamond Shamrock, announced that it was permanently closing its chemical plant that had employed as many as 5,000 workers historically.
https://www.rsworld.com/snix66/diamond.html
Reagan solidly won Lake County and the country by 50/41 and 59/41 in 1980 and 1984. His positive, traditional, patriotic, common-sense, reassuring message was well-received in a county and metropolitan region that was very hard hit by the start of a long-term downturn in manufacturing employment and regional population and economic growth.
George W. Bush was a little more popular in Lake County than the country as a whole, earning a 57/42 win, better than the national 53/46. Bush, Sr.’s WWII pedigree, executive experience and countenance played well in Lake County.
The 1992 election, pitting Bush, Sr.’s continuity, generation, broken tax promise, moderate social and economic views against Clinton’s contrasting policies was a divisive election, the true beginning of our polarized red versus blue state situation today.
In 1996, Bush’s support dropped from 57% to just 38%, while the national vote fell from 53% to 38%. Bush beat Clinton in Lake County 38% to 36%, the one non-match in the 15 elections.
Lake County was enamored with Ross Perot, offering him 26% of the vote in 1992 versus his 19-point national haul.
I worked for Ross Perot’s EDS in the 1980’s, as a headquarters financial analyst and project manager, producing the kinds of “charts and graphs” he loved to use in debates and press conferences. Ross was the most “what you see is what you get politician” I have ever seen. He believed that there are pragmatic, straightforward answers to any problem, and had lived a life demonstrating that this was true in the IT business, inventing the outsourced IT model and selling it to government agencies and corporations, just as he had sold mainframe computers in record volumes for IBM.
Ross was an anti-politician, a nationalist, a leader, a persuader, a man of integrity, a team player, a Texan, an outsider and very customer focused. Even with his significant campaign flaws, he was able to many attract voters who wanted to vote “none of the above”. I don’t believe his appeal was one of subtle racism, anti-immigration or historical pandering to a simpler, more culturally conservative time. Ross believed in progress, science and business.
Perot attracted 14% of Lake County voters in the next election, almost double the 8% national tally.
Clinton edged Dole 44/42 in Lake County in 1996, significantly behind his 49/41 national victory. In essence, this was a “none of the above” election for many in Lake County.
Lake County was an optimistic, fast-growing growing county for many years, tripling its population from 50,000 in 1940 to 149,000 in 1960 as Cuyahoga County grew, freeways opened, and people moved further from the central city. The county added another 50,000 people by 1972 as regional shopping malls such as the Great Lakes Mall opened by the Youngstown DeBartolo’s provided new attractions at the edge of the metro area. Growth slowed significantly after that, with the county adding just 20,000 people in the next 20 years through 1992 and another 14,000 people in the next 20 years. This change in the local environment from boom town to slow growth aggravated concerns about the country’s direction.
In 2000, George HW Bush, Jr. was able to capitalize on his message of “compassionate conservatism”, winning Lake County by 50/45, better than his narrow 48/49 popular vote loss. Even with the 9/11 patriotism bump, Lake County and the nation only narrowly re-elected Bush, Jr. by 51/48.
Obama’s centrist “hope and change” message attracted a few more Lake Countian’s to the Democratic ticket in 2004, earning a narrow 49.5% to 48.6% win, much tighter than the national 53/46 win.
The tables were turned in 2012, with Romney beating Obama by the same 49.5% to 48.6% result, in contrast with Obama’s 51/47-point victory. The 14/15 election match was broken. Lake County’s Republican share was 3 points higher than the nation this year, but its average Republican tilt for the last 16 elections was less than 1%.
Trump’s 2016 nationalist, populist, anti-immigrant, anti-globalization message played well in Lake County. He earned 5 points more than Romney, earning a solid 55/40 win, far ahead of his 46/48-point popular vote loss to Hillary Clinton. As with other blue collar, middle class, rust belt, Midwest states that had historically supported the Democrats, Lake County voted “no”, offering just 40% to Clinton.
2020 was very similar to 2016 in Lake County. Trump beat Biden 56/43 in Lake County, discounting Biden’s small-town Pennsylvania roots claims and centrist messages. Biden increased the Democrats’ national popular vote margin to 51/47.
It’s difficult to reconcile the 20-point swing from LBJ’s 1964 62/38 victory with Trump’s 56/43 advantage in 2020. Goldwater was a weak Republican candidate, promoting a conservative “philosophy” and radical “for the time” policies. Biden is a lifetime Washington politician, subject to obvious criticisms.
From Wallace to Anderson to Perot to Trump, a significant share of independent Lake County voters has been attracted to “outsider” national political candidates. The shared national experience of the Depression and WWII and bipartisan support for national leaders like FDR, Eisenhower, Kennedy and Reagan is nearly gone.
Since Reagan’s 1980 50/41 victory, Lake County has averaged a 51/43 Republican advantage. Based on Trump’s recent higher results (55-56%), Lake County looks to be a solid Red county today, leaving behind it’s Purple history.
I was a wide-eyed young adult when the US last experienced 12% and 15% inflation rates. Our current situation is very different from that sad time 50 years ago. Fiscal policy was much looser, with LBJ pursuing a both “guns and butter” policy and Nixon following along. Monetary policy was slightly accommodating in the 70’s, comparable to today. The “supply shock” in the 70’s was much larger. The US was then much more dependent on foreign oil imports. Today the US is roughly “energy independent”, so subject to global price changes only. In the 1970’s, labor unions had some degree of power against the largest manufacturing concerns and used that power to attempt to maintain workers’ wages. There is no similar labor power today.
The inflection point is March, 2021. 2-3% inflation before then. 6% inflation in the last year. 6% is much higher than the 2% trend of the last 2-3 decades, but not a harbinger of spiraling inflation or wage-price spirals or cost-push inflation.
The doubling of global energy prices since the end of 2020 is apparent. This was driven by the unexpectedly rapid global recovery from the pandemic (good news, overall) and the supply crimp from the Russian invasion of Ukraine. Energy is a 7% weight in consumer prices, so a doubling has a tremendous effect.
US demand for durable goods spiked by 50% within the pandemic, as in-person services were unavailable. This completely unexpected increase in demand for final goods drove a completely unexpected demand for commodity inputs, resulting in much higher prices that continue through today.
https://fred.stlouisfed.org/series/CPIFABSL
Food price increases also spiked. The pandemic interrupted direct agriculture and food processing labor inputs. Raw food inflation reached 16%, while “away from home” food prices grew by just 7%.
Lodging and used car inflation exceeded 20% but is now slowing. New car prices increased by 12%, but this price increase is back down to a 7% annual rate.
6%.
3-4%.
3-5%.
4-5%.
Drugs 2%. Medical Services 6%.
Communication and IT continue their price decreases after a small increase.
1-2% annual inflation.
Household furnishings, up 9% like other consumer durables.
Food away from home, up 6-7%, despite the incredible disruptions in the last 2-3 years.
Energy, food and commodities prices have increased sharply in the last year. The other dozen price indices have increased by 5-6-7% and then flattened off. Loose fiscal and monetary policy, combined with commodities price spikes have driven quite high consumer price inflation for the last 6-9 months. Inflation will drop from 8% to 6% in the 3rd quarter and then to 4% in the 4th quarter and then lower into 2023.
There is no indication of rapidly increasing prices or a wage-price spiral. US labor unions don’t have the power to respond to the recent unexpected increase in consumer prices with a demand for equal or higher wage increases. Wages have increased by 5% in the last 2 years as inflation has spiked to 8%.
