A peak beneath the hood of the ‘strongest economy in modern history’

As both 2024 and the Biden administration come to a close, a lot of discussion is swirling around the economy. What will the incoming Trump administration do? Are you better off than you were four years ago? In what condition is the economy that Trump is about to inherit?

It is the last question that will be the focus of this article.

Biden and his supporters are crowing that they are handing over “the strongest economy in modern history,” while pointing to low unemployment rates, cooling inflation, and a supposed “soft landing” after COVID lockdowns.

That’s their headline. But if you scratch beneath the surface, a different story begins to emerge.

Jobs

At 4.2%, the reported unemployment rate is still low by historical standards. This rate, however, is up 0.8% since the lows in 2023. As investment analysts are pointing out, every time the unemployment rate has increased by 0.5% or more, the US has entered a recession.

The November jobs report, the last one we’ll see this year, showed payroll employment rising by 227,000. Many hailed this as a nice rebound after October’s dismal jobs report.

Digging deeper into the report, however, reveals more troubling news.

It’s important to note that the payroll employment number showing 227,000 new jobs is taken from the establishment survey, which attempts to measure the number of people on payrolls at establishments. This measures the number of jobs, but not the number of people with jobs.

The household survey, which asks people directly whether they are employed or not, attempts to measure the number of people actually employed — be it with one, two, or more jobs.

The household survey showed the number of employed people fell by 355,000 in November. Year-over-year figures show a concerning 725,000 fewer employed people.

The large discrepancy between the establishment and household surveys can largely be explained by people taking multiple jobs. If I take on a second job, I may be counted as two jobs in the establishment survey because I am on two payrolls, but I am still just one employed person.

Indeed, the number of employed people in the household survey has been flat for 18 months.

The supposed growth in jobs is actually a reflection of a growing number of people taking part-time jobs. Over the past year, full-time jobs have actually fallen by 1.3 million, while part-time jobs have increased by 634,000. Full-time jobs have been negative year over year for 10 straight months.

That is another very concerning sign. As Ryan McMaken of the Mises Institute wrote, “Whenever year over year full-time work has gone negative for three months or more, the US has either been in recession or approaching a recession.”

Furthermore, temporary jobs fell 5% last month, continuing a trend that has persisted for two straight years. Temporary workers are typically the canary in the coal mine because they are the easiest to let go when times get difficult.

Lastly, the ratio of government workers to private-sector workers has been rising for the past two years. Government workers are much more insulated from layoffs during economic downturns than are private-sector workers.

In sum, the number of people employed is falling, while much of the reported job growth can be attributed to government growth and people forced to take second or third jobs. One would be hard pressed to make the case that such trends represent “the strongest economy in modern history.”

Inflation

Thankfully, the rate of inflation has fallen significantly since the historic highs of 2022. This does not mean that the prices of goods are falling; however, just that prices are rising at a slower rate.

At 2.7% over the past year, inflation stubbornly remains above the Federal Reserve’s stated 2% goal. The one-month uptick of 0.3% in prices in November is up from the previous month and the highest since April. So, even by their own standards, the Fed’s battle against inflation is far from won.

Likely recognizing weakness in the labor market, the Fed over the past few months has embarked on an aggressive pace of lowering interest rates once again, despite inflation remaining above target.

And the Fed’s drastic and historic interest rate hikes beginning in early 2022 and continuing into late 2023 to rein in inflation put a significant damper on the economy by making investment much more expensive.

So now we confront a situation in which economic activity is slowed due to previous interest rate hikes combined with stubborn inflation possibly ticking back up once again.

Manufacturing declining

As stated previously, the aggressive interest-rate hikes in 2022 and 2023 made business investment financed through borrowing much more expensive. Reflecting this trend, a leading manufacturing index remained in contraction in November, marking 13 consecutive months of decline. Analysts noted that companies are “continuing to use attrition and layoffs to manage headcount.”

Real estate bubbles bursting?

Another byproduct of the recent interest-rate increases is the popping of the real estate bubble, which had been propped up by years of artificially low interest rates and supercharged in the last few years by the massive money printing in response to COVID.

Median home prices exploded by 40% in just a year and a half by the end of 2022. Housing unaffordability reached all-time highs earlier this year.

Following such bubbles, however, is the inevitable bust.

Housing starts have been falling significantly, dropping 28% in about the last year and a half.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) measures builder sentiment, with scores lower than 50 signaling a contractionary, negative outlook. While this score ticked up slightly in November, it remained below 50 for the seventh month in a row — and 13 of the past 15 months.

What may be of even greater concern is the commercial real estate industry, which the Harvard Business Review recently warned is “headed toward a crisis.” Over the next two years, more than $1 trillion in commercial real estate (CRE) loans will come due. With office vacancies in America’s top metro areas at all-time highs and the CRE bubble bursting perhaps more severely than housing, delinquent and defaulted loan repayments to banks are likely to rise to troubling levels.

The cracks are already beginning to appear. The percent of nonperforming CRE loans has doubled since 2022, and the distress rate for CRE bridge loans across all commercial real estate sectors reached an all-time high in September.

The Harvard Business Review piece warns that the damage from the CRE bubble bursting “could metastasize into a full-blown financial crisis.”

Conclusion

Other strong headwinds confront the economy, such as credit card debt rising to all-time highs and a national debt now exceeding a mind-boggling $36 trillion. The national debt now stands at roughly 120% of the nation’s gross domestic product, a rate slightly down from the COVID high but still at historically high levels.

The Federal Reserve’s massive money printing — especially in the wake of COVID lockdowns — has temporarily papered over economic problems while propping up stock market and housing prices. This benefits the already wealthy investor class while inflation on everyday goods crushes the working class.

Despite claims of this being the “strongest economy in modern history,” there is ample evidence to point to the incoming Trump administration being confronted with a stagnating economy — or worse.