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 in today’s column to add some humor to the serious question of what kind of an economy we have now?
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 address first.
A soft-landing for the economy is exactly what the Federal Reserve (the “Fed”) 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.
A full-employment recession means 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 the economic contraction to be widespread, including job losses.
A full-employment recession implies 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.
Why would the job market be spared in a full-employment recession? It’s a result of the Covid pandemic and anticipated shortages in workers. Many firms had trouble hiring workers during and after Covid. 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 one-half and one percent annually, less than half the rate of 50 years ago.
Now on to 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. Companies making products did well as consumers purchased items like furniture, clothing, and vehicles they couldn’t get during Covid. Hence, a recession first hit service companies 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.
Still confused — I am too. Hopefully this time next year we’ll know what we’ve been through.