|Does It Matter?||
28 July 2022
Cogito Ergo Non Serviam
The American economy declined by 0.9% in the second quarter. This follows a 1.6% decline in the first quarter. The rule of thumb in economics is that, if the economy shrinks two quarters consecutively, the economy is in recession. However, that rule does not really fit the current situation. Unemployment is below what is usually considered full employment. The Fed is raising rates to tackle inflation. These are not signs of a recession but of an economy that is running hot. The next few months may provide some clarity on where the economy lies, but just as possible, it may not.
CNBC reported, "The decline came from a broad swath of factors, including decreases in inventories, residential and nonresidential investment, and government spending at the federal, state and local levels. Gross private domestic investment tumbled 13.5% for the three-month period.
"Consumer spending, as measured through personal consumption expenditures, increased just 1% for the period as inflation accelerated. Spending on services accelerated during the period by 4.1%, but that was offset by declines in nondurable goods of 5.5% and durable goods of 2.6%.
"Inventories, which helped boost GDP in 2021, were a drag on growth in the second quarter, subtracting 2 percentage points from the total."
That last point is vital. Without that drag, GDP would have risen 1.1%. Inventories cannot fall indefinitely. When the warehouses are empty, there is no farther they can fall. Rarely do the warehouses wind up completely empty. Before that happens, businesses begin to restock them. That should be happening in the next few months.
The main problem is the housing shortage. The US simply does not have enough to soften prices, and with interest rates rising, new construction is not going to increase enough over the next year to ameliorate the problem. Because housing construction accounts for so much of GDP (15-18%, with retail investment around 3-5% and consumption spending on housing, things like gross rents and utilities, make up 12-13%), it will take a turn around here to really shift the paradigm.
Another factor that one must consider is fiscal policy, such as it is. When the Fed Funds Rate was 0%, the country should have been borrowing and spending to build infrastructure. Having missed that boat, the government should now be raising taxes to slow the economy and to reduce the debt. Because Congress is full of lawyers and not economists, one can presume this will not happen. That is a pity, because properly targeted tax increases would slow the economy without sending interest rates higher. At the same time, the country could start paying down the debts incurred as part of the pandemic emergency measures that kept the economy from freezing up altogether.
Above all, one must remember that the economic problems the country, and indeed the world, face have their roots somewhere other than in the economy. Recovering from the pandemic and the war in Ukraine will simply take time, and the economy cannot really get back to whatever normal may now be without those two issues being fixed. The pandemic is biological in nature, and the war is geopolitical. Economic tools can do only so much in reaction to them.
With two quarters of negative economic growth, many are wondering if it is a recession. Perhaps a better questions is whether the current situation is an anomaly that is best filed as an exception to almost all the rules. That is how the wise money is betting.
© Copyright 2022 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.