Clint Eastwood has long been one of my favorite actors. A movie that propelled him to stardom was “The Good, the Bad, and the Ugly.” I think a title with a slight change, to “The Good, the Bad, and the Uncertain,” is a great description of today’s economy.
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 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 two-years old).
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.
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%. Today inflation is running at 4.9% annually.
Now on to the “bad” part of the economy. Although price increases are slowing, this doesn’t mean all prices are falling. Indeed, 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, manufacturing, and existing home sales have showed signs of significant slowing.
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.
And the uncertain
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. However, my reading of the situation is no widespread banking failure is imminent.
We’ve seen the drama over raising the debt limit before. Fortunately, compromises between competing views and polices 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, unsure territory.
Three possible endings
In my Clint Eastwood version of the economy, I think there are three possible outcomes. The first is the best — a slowdown in economic growth, but no recession. Jobs are not lost, inflation is reduced to 2%, and the Federal Reserve cuts interest rates in 2024.
The second option is the opposite of the first. The economy eventually slips into a standard recession. 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 is resumed 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 an economic script turning out that way? Keep watching.