Economic Thoughts
How do I know?
Maybe you’re trying to use me.
Flying too high can confuse me.
Touch me but don’t take me down.
How can I be sure?
In a world, that’s constantly changing.
How can I be sure?
I really, really, really wanna know!
The Young Rascals - How can I be sure (1967)
…..
It’s a good thing you don’t pay anything to read this blog. Occasionally, I make predictions about things. And I want to make sure they are worth what you are paying. Zero is the right price. I am writing this on July 25, 2023, and here follow my views and observations on the economy and what is going on out there. These thoughts are politically neutral and I try to be as objective as I can be.
Inflation: Reading much of the press, you might think that the inflation dragon has been vanquished. I don’t think so. Much of the reason that inflation has been declining is that energy prices have been dropping. The price of oil fell over 30% from one year ago before bouncing back up some in the last three weeks. Energy goes into literally everything you buy and if it starts going up more (which I think it will), then the price of everything else will have to go up as well. Housing prices dropped last year but have now stabilized, again taking away some downward pressure on inflation. And maybe you got a 4% raise at your job last year when inflation was 9%. You basically got a pay cut in terms of what that salary can buy. This year, you will want to start catching up. So, do a lot of other people. Strikes are in process or looming in Hollywood, Auto Workers, Airline Pilots, UPS and Fed-Ex just to name a few. Because unemployment is low, the workers are in the better position here. Contracts recently concluded are getting raises of 30-40% over four years. The prices of the products and services those people create will have to go up for three or four years to pay for that. The bottom line is that while inflation is lower than it’s been and is unlikely to return to 9% soon, I think inflation will be sticky and staying in the 3-6% range for a while.
Growth: In my last missive on this topic, I told you that it just didn’t feel like we were headed for recession in spite of the prognostications otherwise of most of the big New York based pundits. I still don’t believe a recession is in the offing this calendar year. Unemployment is low. People still have cash from the lockdowns and housing prices stopped dropping and are even reaccelerating in some markets. When people have jobs, cash and equity in their homes, they spend. Yes, the Fed has raised interest rates a bunch. Yes, they are back to drawing money out of the economy instead of printing it. But on the other side, the Federal deficit this year now looks like it may be $1.5 Trillion. Much of this increased deficit is due to the money being released from the three big spending programs passed since Biden became president. (Inflation Reduction, Chips and Infrastructure Acts.) These three bills total $2.3 Trillion in additional spending over about three years. Taking aside the virtues or lack thereof in these bills, they are pumping enough new money in the economy on a fiscal basis to offset the monetary actions the Fed is taking to slow the economy down. In my estimation, growth will not be robust. But it is hard for me to see an economic contraction when people have cash and assets and are working alongside a government that is spending money. Absent of course some major “black swan” shock.
Interest Rates: By the time you read this, the Fed will likely have raised the Fed Funds rate again to an effective rate of 5.4%. If my inflation predictions are correct, they will probably raise again before the year is out and the short-term treasury rate will be just under 6%. Everyone talks about the inverted yield curve and how predictive it is of a recession. But if a recession is not imminent, and short-term rates are still increasing, it is hard for me to believe that longer term (2-10 year) rates won’t rise as well. Furthermore, the Treasury will issue a record $3 trillion in new debt in 2024, largely in longer term notes. More supply means the rates should go up.
Farther into the Future: So, those are my views about the economy for the next six months or so. But you can stand in your backyard on a nice sunny day, not able to see the storm clouds building over the horizon. I do not think the business cycle has been repealed. If you take out the artificial lockdown-induced 3-month recession in 2020, we have not had a “natural” recession in over 14 years now. I have a chart of such things on my wall that goes back 100 years. We have never gone over 10 years without an economic downturn in that time. There are a lot of forces building that could trigger the next downturn in 2024 or 2025. Increasing interest rates will put a lot of companies and leveraged investments in distress as their existing loans mature. Productivity in the U.S. has been declining, which can raise unemployment as companies try to do more with less people. Many asset values have been inflated to stratospheric levels by the lockdown cash which will come back to earth at some point. And these massive deficits that are stimulative to the economy right now, add to the Federal Debt which is sucking cash out of other productive uses. This will have a dilatory affect at some point. Whenever the next downturn hits, I suspect it will be deep and long rather than short and shallow as one trigger causes another bubble to burst and it continues until the many excesses building for 14 years have been wrung out of the economy.
The Fed: I do not agree with much that Fed Chairman Powell or his predecessor have done. That said, they are well-qualified economists or businesspeople with the requisite background who are doing the best job they know how following their congressionally imposed dual mandate of price stability and maximum employment. That may change, however. The recent Biden appointees have been chosen for their “diversity” rather than their experience. They are largely academics and often labor or social justice leaders with no background in economics. Powell will retire at some point and what the Fed does after that may be very, very different than any prior Feds. And what the Fed does matters. They can destroy the value of a dollar by printing too much money or they can preserve it, for example. And they can make these decisions for what they believe at the time are noble reasons.
You can watch the actions of participants in an economy and make an informed judgement about how they will act in a given economic circumstance. But it is much more difficult to predict the actions of a political body that can be influenced by interests other than the general economic well-being.
In the words of the Young Rascals song, How can I be sure about all this?
I can’t.
I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free