By Mike Walden
When I was growing up in the 1950s, I was a fan of the Superman TV show. The program opened with the announcer looking up at the sky and saying, “It’s a bird, it’s a plane, it’s Superman!” I’ve used a modified version of today’s column to add some humor to the serious question of what kind of an economy we have now. Many say the economy is not changing according to the script we’ve usually seen in the past. As a result, there’s confusion and concern about where the economy is headed.
There’ve been numerous explanations given, with some suggesting good times ahead and others indicating bad times, but all pointing to an unusual economy. We’re hearing phrases and terms like a soft landing economy, a full employment recession, a rich recession, a rolling recession and an economy ultimately headed for a big crash.
I’ll attempt to explain what all these phrases and terms mean. Then, as is always the case, I’ll let you decide which picture of the economy makes the most sense.
The various interpretations of the economy are divided into the good and the bad. On the good side are a soft landing economy and a full-employment economy, which I’ll turn to first.
A soft landing for the economy is exactly what the Federal Reserve is trying to accomplish with its interest rate hikes. By slowly increasing interest rates over the past two years, the Fed wants to moderate the pace of economic growth and bring buying more in line with the supply of goods and services. The result would be to take the pressure off prices and lower the rate of price increases. Through this gradual approach, the Fed hopes the economy will still grow, although more slowly, thereby avoiding a crash into a recession. A recession means the economy contracts, that is, gets smaller.
Right now, with the economy continuing to expand and with the year-over-year inflation rate reduced from 9% to 3%, many think the Fed could guide the economy into landing safely on the runway of lower inflation. The soft landing means the inflation rate returns to a normal level without the pain of job losses and economic retreat. A soft landing is obviously the best result for the country, but it has been difficult to achieve in the past.
A full employment recession is a term several economists have used to describe today’s unusual economy. The idea is the economy will eventually slip into a recession, but it won’t impact the job market. This is different because the accepted definition of a recession requires economic contraction to be widespread, including job losses.
A full employment recession means the non-labor part of the economy — such as technology, machinery, finance and construction — will suffer. But the labor part of the economy won’t. Unlike a normal recession, in a full employment recession, the unemployment rate remains low and aggregate job losses don’t happen. Sure, as always occurs, some firms will reduce jobs, but those cuts will be made up by job gains in other sectors.
Why would the job market be spared in a full employment recession? It’s a result of the COVID-19 pandemic and anticipated shortages in workers. Many firms had trouble hiring workers during and after the pandemic. Memories of those difficulties could motivate businesses to keep workers, even if the firms experience reduced sales for a while. Plus, looking ahead, experts see the labor force only expanding between 0.5 and 1% annually, less than half the rate of 50 years ago. Indeed, except for a brief rebound in the early 2000s, labor force growth has been steadily dropping for five decades. The weak labor force outlook is another reason why companies may want to hold on to their workers, even in relatively challenging times.
Now onto the bad interpretations of today’s economy. Some argue the economy is already in a recession, but the difference is it’s mainly been confined to the rich, hence the name rich recession. The tech sector, which pays salaries double that of other jobs, has cut more than 650,000 jobs in 2022 and the first half of 2023. This represents a loss of $65 billion in purchasing power and has hurt businesses catering to higher-income consumers. In contrast, workers in lower-paying jobs have received the highest rate of pay increases this decade. This is because many of those workers have become more valuable to businesses due to the labor shortage affecting several economic sectors.
Another interpretation of the current economic situation is another new term: a rolling recession. Here, a recession rolls through the economy, not impacting all sectors at the same time, but instead affecting each at different times. Initially, sectors supplying services were hit, due to the continuing reluctance of people to personally interact as a result of COVID-19. Companies making products did well as consumers purchased items like furniture, clothing and vehicles they couldn’t get during the pandemic. Hence, a recession hit service companies first but spared product companies.
Eventually, this dichotomy flipped, as higher interest rates made many products too expensive, and fear about the face-to-face contact implied when buying services subsided. So now the recession has rolled past service firms and is hitting product firms.
Last is the viewpoint that the economy may look reasonably good today, but a big crash is eventually coming. Supporters of this idea say rising interest rates combined with high and rising debt will eventually cause an economic implosion.
Are you confused about today’s economy? Don’t worry, you have company; economists are also befuddled. I hope I’ve been able to give you a scorecard for the different interpretations to help you decide how to navigate through today’s uncertainty.
Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.
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