The Irrelevant Recession: Congress Needs To Reverse Course To Improve The Economy – Forbes
Recession talk has dominated the news lately with an endless supply of pundits debating whether the United Sates is in a recession. It’s good to have that debate, but virtually everyone seems to have forgotten the incredibly abnormal circumstances fueling the dispute.
That’s not to say that anyone should ignore the bad policies–there are tons of them–contributing to economic turmoil, but policymakers will just make things worse if they lose sight of what’s happened. The obvious starting point is early 2020.
When COVID-19 started spreading across the country, state and local governments issued stay-at-home orders and effectively shut down the economy. The resulting drop in consumer purchases was unlike anything the nation has previously experienced.
Between the fourth quarter of 2019 and the second quarter of 2020, nominal gross domestic product (NGDP) fell from $21.7 trillion to $19.5 trillion. This 10.22% decline surpasses anything in the historical record. (And although everyone seems to forget, it was followed by a decline in the overall price level.)
Then, almost without warning, the economy roared back to life.
Between the second quarter of 2020 and the fourth quarter of 2020, NGDP increased by 10.27%. Although the NGDP growth rate came very close to this figure in 1950, the 2020 increase is the largest two-quarter increase in the historical record. And it was followed by another 8% increase through the third quarter of 2021.
Naturally, the massive drop in demand caused all kinds of supply problems, and with so many people unable to work, it spurred a burst of federal spending. By the time all was said and done, Congress had pumped out almost $7.5 trillion in stimulus, boosting Americans’ disposable income well above the average growth rate.
Unsurprisingly, the massive surge in consumer demand worsened the many supply-side problems caused by the pandemic and the government-imposed shutdowns, and inflation took off at rates not seen in 40 years.
So, regardless of how one labels the current economy, it is not part of anything close to a normal business cycle.
And forecasters should drop any pretense that they know when things will get back to normal because all such forecasts depend on wildly abnormal data. In other words, forecasting economic outcomes–something that was already, to say the very least, hit or miss–is virtually impossible right now because the data is so anomalous.
These issues are bad enough for anyone who insists on identifying whether the United States is in a recession, but an even bigger problem is that there is no objective definition of a recession. None whatsoever.
As a result, all arguments about whether the economy is formally in a recession are equivalent to unsubstantiated opinion.
It is even somewhat dicey to compare official recessions through time because the National Bureau of Economic Research (NBER) does not use an objective, consistent definition. The official statement reads as follows:
The NBER’s definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. In our interpretation of this definition, we treat the three criteria—depth, diffusion, and duration—as somewhat interchangeable. That is, while each criterion needs to be met individually to some degree, extreme conditions revealed by one criterion may partially offset weaker indications from another.
Because a recession must influence the economy broadly and not be confined to one sector, the committee emphasizes economy-wide measures of economic activity. The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. These include real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions. [Emphasis added.]
A significant decline? More than a few months? Three interchangeable criteria? (And they can offset one another?) No fixed rule? And a bunch of economists have to agree before calling the recession dates?
It’s amazing there is just one set of NBER business cycle dates.
Rather than argue over whether the American economy is in a recession, it makes just as much sense to point out that GDP has declined in consecutive quarters only 5 times since 1947, so the current situation is surely bad.
While that’s not much of a revelation to anyone who’s been paying attention, even right now, in the most abnormal of times, there are both good and bad signs.
For instance, GDP has declined in consecutive quarters, inflation is high, and both total nonfarm payrolls and labor force participation remain below their pre-pandemic levels. Housing starts have fallen to a nine-month low.
On the other hand, the second quarter GDP decrease was smaller than the first quarter decrease, consumer spending has remained strong, industrial production is growing, and personal income increased in both the first and second quarters. Moreover, household balance sheets are strong. For example, debt service payments as a percent of disposable personal income are at an all-time low (the series starts in 1980).
None of these positive signs are meant to “prove” things are fine, or to excuse the policy mistakes that have made the economy worse. There are, in fact, tons of bad policies that have legitimately caused millions of people to bicker over exactly how bad things have gotten.
On the major issues, though, it could be the case that there is no simple policy solution.
For instance, the United States labor market might be in the middle of major shifts due to years of bad policies, the consequences of which the pandemic and government shutdowns simply sped up. The employment gap remains almost 2 percent, meaning that employment is almost 2 percent below where the pre-pandemic trend suggests it would otherwise be right now. However, a close look suggests that the bulk of this gap is explained by workers 65 and older deciding to retire and, to a lesser but large extent, 20 to 24 year-olds dropping out of the labor force.
For years, businesses have been complaining about how hard it is to find workers and warning of the impending retirement of baby boomers. And demographers have long noted the trend toward having less children, but critics consistently scoffed at the idea that there was an actual labor shortage in the United States.
Against that backdrop, Congress steadfastly refused to make any major reforms to the badly broken immigration system, pretty much the only way to get more workers. Whatever the reason, business owners now find themselves having to pay workers more, a higher cost that tends to put upward pressure on consumer prices, thus worsening inflation. (Disturbingly, productivity is at a 75-year low, but that’s for another column.)
And given the supply-side problems that are contributing to high inflation, the Fed finds itself in a major pickle. It must fight inflation to fulfill its legislative mandate and maintain credibility, but it knows that monetary policy is ineffective against price level increases caused by supply-shocks.
So that leaves Americans at the mercy of Congress for positive policy responses, and that’s a most unfortunate position.
In practical terms, the only thing Congress does well is spend other people’s money, exactly the wrong prescription to fight inflation. The recent $7.5 trillion in stimulus/pandemic relief has worsened supply-side problems, driving prices higher. More government spending will only do the same, so for the love all that exists in the universe, Congress should slow its spending roll. (Congress should also ignore the critics who want higher taxes to stem inflation, but I’m pretty sure members don’t need much convincing that now is a bad time to raise taxes.)
Americans would be far better off if the federal government stepped back right now, but Congress doing less is even rarer than consecutive quarterly declines in GDP.
If Americans are lucky, gridlock will set in and there will be no major spending increases prior to the next election. If they’re extremely lucky, Congress will enact major policy reforms that free up private sector workers–even those that produce fossil fuel energy products–to increase the supply of goods and services. It would help clear supply constraints and lower prices, providing more economic opportunities for millions of Americans.
Those would be incredibly abnormal circumstances on Capitol Hill, but that’s how Congress can help fix the bad economy.
Economy grew 0.5 per cent in January, Statistics Canada reports – Ottawa.CityNews.ca
OTTAWA — Economic growth resumed in January and came in better than first expected following a small contraction in December, Statistics Canada said Friday.
Real gross domestic product rose 0.5 per cent to start the year, the agency said, beating its initial estimate for a gain of 0.3 per cent for the month and reversing a contraction of 0.1 per cent in the final month of 2022.
Statistics Canada also said its initial estimate for February indicates growth continued with a gain of 0.3 per cent, though it cautioned the figure will be updated.
“There were many indications that the economy got off to a solid start in 2023, but today’s double-barrelled blast of strength is well above even the most optimistic views,” BMO chief economist Douglas Porter wrote in a report.
“Even if growth stalls in March, it now looks like Q1 will post growth of 2.5 per cent, up from a flat read in Q4. While we continue to look for a notable cooldown in the next two quarters, we are bumping up our GDP growth estimate for all of 2023 by three ticks to 1.0 per cent.”
The growth in January came as goods-producing industries gained 0.4 per cent for the month, while services-producing industries rose 0.6 per cent.
Statistics Canada said many of the main drivers for growth in January also contributed the most to the decline in December.
The wholesale trade, transportation and warehousing, and mining, quarrying and oil and gas extraction sectors all rebounded after falling in the previous month.
Wholesale trade gained 1.8 per cent in January, helped by wholesalers of machinery, equipment and supplies, while the mining, quarrying and oil and gas extraction sector grew 1.1 per cent after falling 3.3 per cent in December.
The transportation and warehousing sector added 1.9 per cent in January, more than offsetting a drop of 1.1 per cent in December that was due in part to bad weather.
This report by The Canadian Press was first published March 31, 2023.
The Canadian Press
Canada's economy shows surprising resilience despite rate hikes – BNN Bloomberg
Canada’s economy kept growing at the start of this year, defying expectations of a stall and eventual technical recession in the face of the highest interest rates in 15 years.
Preliminary data suggest gross domestic product expanded 0.3 per cent in February, Statistics Canada reported Friday in Ottawa, led higher by oil and gas, manufacturing, and finance and insurance sectors. That followed a 0.5 per cent expansion in the previous month, stronger than expectations for 0.4 per cent growth in a Bloomberg survey.
The Canadian economy is now on track to expand at an annualized rate of 2.8 per cent in the first quarter, assuming growth in March comes in flat. That’s much more robust than the 0.5 per cent annualized pace forecast by the Bank of Canada in January, when it signaled a conditional rate pause.
“Today’s double-barreled blast of strength is well above even the most optimistic views,” Bank of Montreal Chief Economist Doug Porter said in a report to investors. “Suffice it to say that if the strength seen in the opening months of the year persists, the BoC is going to find itself in a tough spot.”
Canada’s currency reclaimed nearly all of its losses after the release and bonds rallied. The yield on benchmark government two-year debt fell more than 3 basis points to 3.777 per cent at 9:50 a.m. in Ottawa.
The data suggest while some rate-sensitive sectors like housing have already cooled, overall economic growth is still holding up better than expected. It’s also at odds with a flurry of early estimates released last week that suggested a pullback in economic activity, with retail, wholesale and manufacturing sales all falling in February.
Friday’s numbers will test Governor Tiff Macklem and his officials as they look for evidence that monetary policy is sufficiently restrictive to bring inflation back to the central bank’s 2 per cent target. An accumulation of stronger-than-expected data may prompt them to stay on the sidelines for longer or even hike again.
Traders in overnight swaps markets, however, are betting the Bank of Canada’s next move will be a cut, given turmoil in global financial markets after the failure of regional U.S. lenders and a government brokered takeover of a European banking giant.
Economists in a monthly Bloomberg survey see 1 per cent annualized growth in the first three months of this year. But that’s expected to be followed by two straight quarterly contractions.
During deliberations for the central bank’s March 8 decision to hold rates steady for the first time in nine meetings, policymakers said they saw “clear signals” hikes so far were curbing demand. But there are few signs in recent data that the economy is gearing down.
Both goods-producing and services-producing industries were up in January, with nearly all sectors posting increases, except agriculture, utilities and management of companies.
Rebounds in several industries drove the January gain. Many of the key growth drivers were the largest contributors to December’s 0.1 per cent decline, including wholesale, transportation, and oil and gas industries. Accommodation and food services activity was also a key contributor.
“The Bank of Canada is likely at a crucial juncture and facing a significant dilemma,” Charles St-Arnaud, chief economist at Credit Union Central Alberta Ltd., said in a report to investors. “The central bank may have to choose between fighting inflation and hiking interest rates again or focusing on financial stability and keeping rates on hold.”
UK economy avoids recession but businesses still wary
LONDON, March 31 (Reuters) – Britain’s economy avoided a recession as it grew in the final months of 2022, according to official data which showed a boost to households’ finances from state energy bill subsidies but falling investment by businesses.
With the economy still hobbled by high inflation and worries about a weak growth outlook, gross domestic product (GDP) increased by 0.1% between October and December after a preliminary estimate of no growth.
GDP in the third quarter was also revised to show a 0.1% contraction, a smaller fall than initially thought, the Office for National Statistics (ONS) said on Friday.
Two consecutive quarters of contraction would have represented a recession.
Despite the improvement, British economic output remained 0.6% below its level of late 2019, the only G7 economy not to have recovered from the COVID-19 pandemic.
“The latest release takes the UK a little further away from the recessionary danger zone although the report does not change the overall picture that the economy’s performance was lacklustre over the second half of 2022 as the cost of living crisis hit hard,” Investec economist Philip Shaw said.
The International Monetary Fund forecast in January that Britain would be the only Group of Seven major advanced economy to shrink in 2023, in large part because of an inflation rate that remains above 10%.
Since then, a string of economic data has come in stronger than expected by analysts.
Ruth Gregory at Capital Economics said Friday’s figures showed high inflation had taken a slightly smaller toll than previously thought.
“But with around two-thirds of the drag on real activity from higher rates yet to be felt, we still think the economy will slip into a recession this year,” she said.
House prices slid in March at the fastest annual rate since the financial crisis, mortgage lender Nationwide said.
The Bank of England (BoE) last week raised interest rates for the 11th consecutive meeting and investors are split on the possibility of another increase in May.
Britain’s dominant services sector rose by 0.1%, boosted by a nearly 11% jump for travel agents, echoing other data which has pointed to a surge in demand for holidays.
Manufacturing grew by 0.5%, driven by the often erratic pharmaceutical sector, and construction grew by 1.3%.
Individuals’ savings were boosted by the government’s energy bill support scheme and households’ disposable income increased by 1.3% after four consecutive quarters of negative growth.
The BoE expects Britain’s economy to have contracted by 0.1% in the first three months of 2023 but it forecasts slight growth in the second quarter.
The outlook has improved thanks in large part to falling international energy prices and a strong jobs market.
But the picture could darken again if recent turmoil in the global banking sector leads to lenders reining in loans.
BUSINESS INVESTMENT FALLS
The data suggested businesses remained cautious. Business investment fell 0.2% in quarterly terms, a sharp downgrade from a first estimate of a 4.8% rise after changes to the way the ONS calculates seasonal adjustments.
Earlier on Friday, a survey painted a more upbeat picture for businesses.
Finance minister Jeremy Hunt this month announced new tax incentives to encourage companies to invest, although they were less generous than a previous scheme and came just as corporate tax is due to jump.
The ONS said Britain posted a shortfall in its current account in the fourth quarter of 2.5 billion pounds ($3.1 billion), or 0.4% of GDP.
Excluding volatile swings in precious metals, the shortfall fell to 3.3% of GDP from 4.2% in the third quarter.
The ONS said increased foreign earnings by companies, particularly in the energy sector, helped narrow the deficit.
Britain’s financial account surplus – which shows how the current account deficit was funded – comprised large net inflows of short-term, “hot” money. Foreign direct investment was negative in net terms for a sixth quarter running.
($1 = 0.8073 pounds)
Our Standards: The Thomson Reuters Trust Principles.
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