The U.S. economy is sinking into a recession, a persistent, widespread contraction of economic activity. It will not become official until July 28 after the government releases the data for the Gross Domestic Product (GDP). However, the economic storm clouds have been forming this entire year.
In the face of warning signs, economists, market analysts and the Biden Administration never wavered from rosy economic predictions. Even when the GDP declined 1.6% in the first quarter, they spun the news as a speed bump. The economy was poised for a rebound.
There will be a rude awakening when the second quarter GDP data drops on Wall Streets this week. The Atlanta Federal Reserve, which tracks GDP weekly, is forecasting a 1.6% decline. Negative growth in two consultive quarters meets the economic criteria for a recession.
Experts assured Americans that inflation was only temporary. The economy was just shaking off the cobwebs after the pandemic lockdown. Recession was a distant chance. How did everyone from Treasury Secretary Janet Yellen to Fed Chairman Jerome Powell to Wall Street get it so wrong?
The answer: They viewed the current economic conditions through the lens of past economic recoveries.
There has never been a volcanic disruption as what occurred in 2020 with the exception of the Great Depression. The U.S. sustained massive job losses, extensive business closures, broken supply chains and the shutdown of manufacturing. This was unlike any past economic jolt.
For months, the recession-deniers have pointed to strong job growth as a sign the economy is rebounding from the first quarter GDP doldrums. In the past, job growth indicated a growing economy. But the job figures are not a reliable predictor in the wake of the pandemic that shutdown the economy.
The American economy lost 22 million jobs from February to April, 2020. By the end of that year, there were still more than 11 million unemployed Americans. In 2021, the economy added 6.7 million jobs. This year the job gains stand at 2.74 million. That's 9.4 million jobs in one-and-a-half years.
For the most part, these gains reflect people returning to their former jobs after being laid off. Most are not new jobs created by innovation or business investment, which would indicate growth. Federal Reserve data shows the number of workers today are 500,000 below the level in February, 2020.
In the midst of reported job gains, 11 million job openings remain unfilled, despite six million unemployed workers. During the economic boom of 2019, job openings averaged 7 million. America's labor supply has been depleted because fewer workers are in the job market.
The labor pool shortage may be partially attributed to the 2.4 million workers who retired early in the first 18-months of the pandemic. Total retirements from March 2020 to July 2021 reached 4.2 million. Anecdotal evidence suggests some retirees are re-entering the workforce due to inflation.
A phenomenon know as the "Great Resignation" is also roiling the job market. The BLS reports 47 million workers voluntarily quit their jobs in 2021. The trend is likely to continue. A McKinsey study finds 40% of workers and the self-employed expect to leave their jobs in the next three to six months.
Many take time off to re-evaluate their career options and personal priorities. If they return to a job, it usually is for better pay, more opportunities for advancement, improved work-life balance and job flexibility. This constant churn in-and-out of the workforce helps explain the 11 million job openings.
Confronted with this evidence, experts cite the low unemployment of 3.6% as as sign a recession is unlikely. Bureau of Labor Statistics unemployment data does not count so-called discouraged workers or those "marginally" attached to the workforce who haven't sought a job in a month.
Buried in the BLS statistical tables is a figure known as the U-6 data. The St. Louis Federal Reserve watches this number more closely than the headline figure generated by the government. The metric measures real unemployment at 7.0%, by including discouraged and marginally attached workers.
Another measurement of economic activity is total retail sales, a key indicator of consumer spending. Retail sales ticked up 1% in May, but adjusted for 1.3% price inflation for the month, sales actually declined.
Consumer spending is the best barometer of the economy, because it accounts for about 70% of the GDP. Looking back, the feverish spending of late 2021 and earlier this year was predictable.
The average American had saved 33% of household income during 2020, building a financial cushion. Coupled with stimulus payments, consumers were flush with cash. After paying off $82 billion in credit card debt in 2020, credit availability shored up consumer confidence to keep shelling out money.
However, as inflation heated up, soaring to 9.1% recently, spending began tapering off over time. Stimulus payments dried up. Enhanced unemployment benefits ended. Americans began dipping into savings to sustain spending. Today households are saving just 4.4% of income.
The latest data from the Bureau of Economic Analysis shows credit card debt jumped 20% in April (the latest figure available) to a near record of $1.103 trillion. The Fed reports revolving debt and credit card balances combined skyrocketed 19.6% from the previous year in April.
In another harbinger of a slowdown, June saw a 20-year low for home mortgage applications as average home prices hit a record. A spike in interest rates, orchestrated by the Fed, discouraged many first-time homebuyers from purchasing a home. Homebuilders are are preparing for a downturn.
Perhaps, the clearest clue of economic trouble is Americans are cutting back on driving. Motorists purchased almost 10% less fuel in the week ended July 9 and an estimated 7.8% less in the week ended July 16. Gas prices are falling because inflated prices are curbing demand.
With the spending binge ending, consumers are in a gloomy mood. Consumer Sentiment data tracked monthly by the University of Michigan reveals confidence has fallen to 51.1% from 81.2% just a year ago. When people feel less confident, it influences their spending and saving habits.
Businesses are grappling with uncertainty too. Microsoft, Tesla, Netflix, Google and J.P. Morgan head a list of business firms either laying off workers or reducing hiring. In May, the latest figure available, 1.4 million workers were laid off and discharged. Jobless claims in June were the highest since January.
Once the government data confirms what consumers already know, don't expect an about face from the experts or an admission of failure to forecast the recession. The usual suspects, Wall Street and the administration, will begin preaching a recovery is just a quarter away.
No doubt, at some point, the economy will begin to right itself. But the lingering question is: "How long will that take?" Be forewarned that no one really knows that answer, however, you can bet there will be plenty of forecasters touting a turnaround soon.
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