You Decide: Is the Economy Good, Bad or Uncertain?
By Mike Walden
Clint Eastwood has long been one of my favorite actors, going all the way back to his TV series “Rawhide” in the 1950s and ‘60s. A movie that propelled him to stardom was “The Good, the Bad and the Ugly.” With a slight change to “The Good, the Bad and the Uncertain” that title is a great description of today’s economy. This is because there are some good aspects to the current economy, along with some bad parts, topped off with some uncertain features. In today’s column, I’ll try to provide some of each component but leave it up to you to decide which dominates.
There are plenty of “good” parts in today’s economy. The broadest measure of the economy – Gross Domestic Product (GDP) – continues to increase. This means the aggregate size of the economy is expanding and generating more production and income. The rule of thumb definition for a recession is two consecutive quarterly declines in GDP, so by this definition, we’ve not been in a recession.
The labor market continues to gain. Although job growth is not as strong as immediately after the pandemic, jobs are being added at a healthy pace. The unemployment rate is now 3.4%, the lowest since 1953 (when I was 2 years old). A broader measure of the jobless rate, which also includes people who have stopped looking for work, has been trending downward.
The job gains have led to a reduction in the labor shortage that appeared during and after the pandemic. There is now only one-half job opening per every unemployed person. This is down from almost five openings per jobless person at the height of the pandemic and down from over one opening per unemployed person two years ago.
The improvement in the labor shortage has been a tremendous help to those economic sectors that have had trouble finding labor in the aftermath of the pandemic. In recent months, we’ve seen big gains in employment in restaurants, manufacturing, government and health care, bringing some of these sectors back to pre-pandemic job levels.
But perhaps the biggest positive trend has been the moderation in price increases – aka, inflation. Don’t get me wrong, average prices are still rising, but they are rising at a slower pace. For example, last summer, the year-over-year inflation rate reached 9.1%. The latest inflation reading, measuring the change in average prices from April 2022 to April 2023, shows the rate now at 4.9%. The moderation in the inflation rate means more workers are seeing their pay raises keeping pace with rising prices.
Now onto the “bad” part of the economy, and let me start with inflation. Although price increases are slowing, this doesn’t mean prices are falling. Some are dropping, but most aren’t. Don’t expect most prices to return to their pre-pandemic levels of 2019. This means many people will continue to experience living standards lower than what they were four years ago.
While the overall economy continues to expand, there are some parts of the economy that are retreating. Construction and manufacturing have shown signs of significant slowing. The same is true for existing home sales. What these sectors have in common is the importance of interest rates. As interest rates on loans have risen, financing big projects and purchases has become more expensive.
Data show consumers are also experiencing some added stress. Retail sales have fallen in four of the last five months. Average household income – adjusted for inflation – is lower than it was prior to the pandemic. After pausing during the pandemic, the amount of consumer debt has recently accelerated. The savings that households accumulated during the pandemic have rapidly been diminishing.
Two big issues dominate the “uncertain” category – banking problems and a potential default on U.S. debt securities. The failure of three major banks this year shocked the economy and created worries this is only the start of a larger problem. My reading of the situation is that no widespread banking failure is imminent. Still, whenever any bank fails, it raises worries about the safety of our savings.
We’ve seen the drama over raising the debt limit many times before. Fortunately, compromises between competing views and policies have always occurred – although some have literally come at the last minute. This is still my expectation. But if I’m wrong and a debt limit plan isn’t reached that prevents defaulting on U.S. debt payments, then we’re in new territory. At the least, I would expect interest rates to jump.
So, now that I’ve given you my Clint Eastwood version of the economy, what should you expect? I think there are three options. The first is the best – a slowdown in economic growth but no stoppage in growth that results in a typical recession. Jobs are not lost. The slowdown causes more inflation moderation, and the Federal Reserve begins to reduce interest rates in the first half of 2024. This is the so-called “soft-landing” outcome.
The second option is the opposite of the first. The economy eventually slips into a standard recession by the end of 2023 or the beginning of 2024. Businesses pull back, and unemployment rises. The only good news is the recession is relatively short and shallow, with the jobless rate rising from 3.4% to a range between 5% to 5.5%. By the summer of 2024, growth resumes and the inflation rate is much lower.
The third option is a hybrid. Modest job growth continues, but the economy suffers on the “capital” side, meaning losses to investors in everything from buildings and equipment to stocks. This scenario could actually cause a bigger overall financial plunge than with the second option, but a mid-2024 recovery would still occur.
Hopefully, my economic version of “The Good, the Bad and the Uncertain” will have mostly a pleasing finale. Are we witnessing a script that turns out that way? You decide.
Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.