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Analysis: Economic Crosswinds

Posted on Thursday, August 12, 2021
by AMAC, Robert B. Charles

Storm winds whip down a pass, stirring the valley below, making people uneasy, sending confusing signals. That is what economic data is doing. Is our economy rising or falling, what is the real trajectory? Some thoughts.

First, we just got a “good” employment report – 943,000 new jobs, unemployment down to 5.4 percent. But what does that mean? On the plus side, seeing travel, restaurants, hospitality grow is hopeful. People are getting out and about. See, e.g., U.S. Economy Added 943,000 Jobs in July, Unemployment Rate Fell to 5.4%.

On the other hand, cold gusts abound. We continue to “dig out of a hole.” US unemployment in July 2019 – six months before COVID – was 3.5 percent. Between June 2015 and July 2019, unemployment was never as high as 5.4 percent. So 5.4 percent is nice, but nothing to write home about. Pre-COVID, four prior years were better.

Look through another lens. Yes, the economy has created 4.3 million jobs this year, but we remain 5.7 million jobs below February 2020 – a lot to recapture. Moreover, one-quarter of the “good” report is “government” jobs. From 2008 to 2018, state budgets got tight. COVID compounded job cuts. New federal money is buying back jobs. Nice, no cause to celebrate.

As an aside, government jobs do not “make” things, even if vital. The multiplier effect – number of times a product made generates added jobs – is lower with government jobs. Teachers and law enforcement fell in 2020; teachers are coming back, law enforcement not so much. See, e.g., Nearly All States Suffer Declines in Education Jobs; Nearly All States Suffer Declines in Education Jobs.

Finally, the latest report masks added facts. Labor participation is low, in contrast to record participation from 2017 to 2019.

Why? Generous state and federal unemployment benefits, free money, eviction waivers, other freebies – $6 trillion now disincentivizing labor participation.

Ironically, that fact tightened the labor market, driving up wages. What does that mean? It means those who choose to work are getting more. That, in turn, tells us time to stop paying people for doing nothing and affirms markets’ work. We do not need an artificially high minimum wage if wages respond to demand for labor. Right? Less government is better.

Second point:

Inflation is rising. The more federal spending, the higher the national debt goes (now approaching 30 trillion), and less our dollar is worth since more paper chases less real wealth. Of course, the pending $3 trillion-dollar “infrastructure” bill, driven by one-party government, does not inspire further confidence.

As inflation rises, affecting gas, lumber, steel, everything, something else happens. Real wages – purchasing power of what we earn and save – falls. The means we earn less and pay more, a drag on quality of life, economic security, growth.

In 2018, inflation was 1.9 percent, in 2019 2.3 percent, in 2020 1.4 percent. In 2021, 5.4 percent. Answer:

Stop federal spending.

Third point:

Inflation is accelerating for another reason, energy costs. While Democrats push distant energy dreams, we live right now.

Killing fossil fuel exploration and production, Biden has single-handedly ended US energy independence, making the US dependent on hostile OPEC.

As 2020 COVID recedes, energy demand creeps up, and higher prices are being paid for energy – everywhere.

Energy is just one accelerant for inflation, but big – since used in producing everything. See, e.g., Energy Inflation Gathers Pace As EU Gas, Power Surge To Record. Expect higher gas and oil prices this winter.

Fourth, while inflation rises, we now face another headwind: Competing with post-COVID recovery, we now confront fear of new lockdowns, civil and economic restrictions. These are attributable to fear of a “delta” variant.

Weaker but easier to acquire, the variant will slow the economy, at least temporarily. How much? No one knows, but new restrictions are coming.

Fifth, the Federal Reserve is uneasy, unsure as the rest of us. On one hand, they want modest inflation, tracking modest real growth, but in truth, they cannot project how fast inflation will rise or how high go.

They do not know. Worse, their policies typically lag reality.

If inflation rockets, they will raise interest rates. If the “delta” variant, or God forbid some politically inspired “mega” variant in 2022, slows the economy, they will need to double back, revise predictions, disavow rate increases. Truth is, the Fed is not good at predicting where the economy will go and is always slow. Expect markets to be jittery if fresh uncertainty replaces confidence and if predictability gives way to baffling crosscurrents.

Where does all this leave us? In some ways, we are left looking forward with more uncertainty than last year. If fear of the delta variant fades (as it should), the economy will grow. If excess federal benefits stop flowing, people come off the bench to work at higher wages; the economy will grow. If wild federal spending stops – a very big “if” – fear of inflation may quiet.

But also possible:

Fear of COVID variants may continue, fanned by politicians, slowing the economy. Unjustified federal benefits may flow, disincentivizing labor participation. Massive Federal spending may go unchecked with one-party government until people shout “enough!” Those developments would all buffet economic growth.

In the end, all politics are local, and much economic decision-making is too. Economic decisions boil down to collecting data, thinking about what you have and want, then making choices. America is a country that likes to work, works hard when given a chance, so growth is probably the better bet – if government will just get out of the way and give Americans the chance.

That said before we wrap – two cautions. Conservative economist Milton Friedman reminded us, “the combination of economic and political power in the same hands is a sure recipe for tyranny.” Colin Powell, for whom I worked, reminded us that every decision you make is made on incomplete information; you still need to make the decision – even in crosswinds, downdrafts, storm in the mountain pass.

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2 years ago

I visited the US Debt website a few days ago, so I was surprised (well, not really) to hear last night a PBS news hour reporter say that the US debt was now “22 trillion dollars”. Of course, she (Lisa Desjardins, sp?) considerably underestimated that amount, which is now almost $29 trillion. So progressives are sugar-coating (read: outright lying about) the real situation in this country. Duh.

Also among those numbers ticking furiously up or down is the number of people in the US work force. Today–151,800,000; but in 2000, it was 159,700,000! Not in the labor force today–100,200,000; but in 2000, it was 81,500,000! Clearly, liberal policies aren’t “working” in this country. (I could not pull up numbers for recent years.)

If Biden, Harris, and the rest of the mob get their way, debt will soar, numbers of non-workers will grow, inflation will run rampant, we’ll never get past Covid, more private businesses will fail, and the streets will devolve into chaos. In other words, nothing new. Then the feds will take over everything, and dole out jobs like they’re candy. “Trick or treat?” Doesn’t matter. We’re talking about the dems, after all; it’s all the same to them.

Tim Toroian
Tim Toroian
2 years ago

6+ trillion dollars deficits over the past two years don’t help anything either and the Dems want about 5 trillion in more spending. For those who don’t really know how large a number one trillion is one trillion seconds is approximately thirty-one thousand and six hundred and eighty-eighty YEARS.

2 years ago

Just after being sworn in as President Joe Biden killed the keystone pipeline and fracking on federal .lands, which made the United States no longer energy independent. Yesterday President Biden begged OPEC to increase oil production, for which they did not commit and said they would think about it. Remember that when you get your electric bill, heating bill next winter, fill up your gas tank and pay for the increase of trucking transportation added on to your next shopping excursion.
That’s “Building Back Better”?!?!

2 years ago

Always keep your eye firmly fixed on the larger, macro-economic trends driving the economy. The REAL trends, NOT the noise that the media and so many politicians try to divert our attention with on a daily basis. If you can do that, then navigating the economic minefield that the Biden administration has laid out before us becomes relatively simple to navigate through. The economic winners and losers have already been clearly defined in the global economy based on the set of policies that this administration is imposing and other global leaders have already adopted. The multi-trillion dollar game being played out right in front of us requires an agile and economically literate public, if they hope to survive what will be the most fundamental change of economic and societal circumstances we’ve seen in the last century.

2 years ago

All this seems to be a way to control the American public — especially the big government handouts for Covid unemployment benefits, the moratorium on evictions, and the child care payments. The only problem with those payouts is that inflation will increase, and those relying on the payments will find they can buy less and less. This will cause candidates for election and reelection to push for an increase in government payouts. It is a vicious circle. Ultimately, it will destroy the middle class.

2 years ago

Biden didn’t create new jobs. Period!

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