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The Pinched-Hose Economy – The Atlantic

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This is an edition of The Atlantic Daily, a newsletter that guides you through the biggest stories of the day, helps you discover new ideas, and recommends the best in culture. Sign up for it here.

“It’s not just my opinion that things are weird,” Derek Thompson told me recently. It’s a fact of life, he explained, that the U.S. economy is behaving very strangely right now.

But first, here are three new stories from The Atlantic.


A Flopping Hose

We learned last week that unemployment in the U.S. is as low as it’s been at any time in the past 50 years, and a report released today shows that inflation slowed in July. Those are good things—and yet, economic output has also slowed in 2022, enough that economists are asking whether the country is in a recession.

I caught up with Derek Thompson, a staff writer and the author of the Work in Progress newsletter, about this huge disconnect between job growth and economic growth, and asked why it’s so hard to understand what’s happening with the economy right now. “If economic growth is really declining, it’s one of the strangest downturns in American history,” he told me.

Isabel Fattal: How should a regular, nonexpert person think about this moment in the U.S. economy?

Derek Thompson: When you’re thinking about the economy, you should think about three categories: statistics, labels, and feelings. Statistics, like the inflation rate or the unemployment rate, come from government surveys, and you should trust them, because they are highly descriptive of what is happening to the broader economy.

Feelings come from your personal experience in the economy. Is your local labor market good? How do you feel about whether your income is holding up against inflation?

Labels come from the National Bureau of Economic Research (NBER) Business Cycle Dating Committee. The label of “Are we in a recession or not?” is determined by eight economists. That has nothing to do with your feelings of the local economy at all.

Isabel: You wrote recently that “Are we in a recession?” is the wrong question to ask. Why?

Derek: There’s two reasons why it’s so hard to say whether we’re in a recession right now. Number one, the NBER is not going to render a judgment for several months, several quarters, or more than a year. So why debate now what we might not know for a year?

Number two, the GDP estimate that we just got from the Bureau of Economic Analysis is just that—an estimate—and the estimate will be revised. There’s about a coin-flip chance that the economy actually grew in the first half of 2022. What we know about recent growth unfortunately isn’t solid.

Isabel: What is one thing we do know for sure about the economy right now?

Derek: We know three things for sure. Number one, we know that inflation is very high, historically speaking—one of the highest rates in the past 40 years. Number two, we know that unemployment is low, as low as it’s been in 50 years. The labor market is roaring.

Number three, we know that growth is slowing down. We know that the GDP growth rate was really high in 2021, and we know that it’s slowing down in 2022. We don’t know if it’s what some economists would call a recession.

Isabel: As you’ve written, we’re in an everything-is-weird economy because different factors are behaving in contradictory ways; for example, jobs are growing, but the economy is shrinking. How should people deal with these mixed messages? What should we be paying most attention to?

Derek: Predicting the future of the economy is so hard that it’s useful to have a single metric to look for. The single metric I would watch is inflation, because if inflation starts to come down, as I believe it will in the next few months [it declined to 8.5 percent in July], the Federal Reserve doesn’t have to keep hacking up interest rates. If interest rates don’t keep going up, then the economy will probably get back to growth. So it all flows from inflation, and if I were interested in figuring out the direction of the economy, I’d be obsessed with watching energy prices, housing prices, and retail spending.

Isabel: How are Americans feeling about the economy right now? There’s a possibility that people’s feelings can actually affect where the economy goes from here, right?

Derek: It’s a really important point. Feelings aren’t imaginary. Feelings drive the economy, to a certain extent. When people are optimistic about the future, they spend more money.

But if you ask consumers how they’re feeling about the economy, they increasingly bifurcate by ideology. Republicans say they’re sad about the economy when a Democrat is in the White House. And Democrats say they’re sad about the economy when a Republican is in the White House. So it’s not as useful as it used to be to ask people about their consumer sentiment, because increasingly, consumer sentiment is just political sentiment.

On my podcast, Plain English, the economist Austan Goolsbee made the great point that in 1992, the entire presidential election was about an economic slowdown that had technically already ended. So statistically, the recession was over, but in vibes and feelings, the recession was deepening, and you had this electoral outcome—the defeat of the incumbent president—hinged on feelings of a recession that actually didn’t exist. That goes to show that even if feelings are disconnected from statistics, they still have real-world outcomes.

Isabel: Is this an unprecedented moment for the economy?

Derek: We’ve never had an economy like this, period. This is a cliché, but I’ve called this the pinched-hose economy. If you turn on the water in your backyard hose and you pinch the hose for a while, the water will build up, and then, when you release the hose, it’ll start sputtering wildly, and the hose will flop all over the place in a violent and strange manner. That’s what happened in the economy. We shut off the hose and said no one will fly, no one will go to restaurants, people won’t go to movie theaters. We purposefully shut down the economy because of the pandemic.

But then demand, which is the water, surged beyond supply’s capacity to easily fulfill it. That’s why we’re seeing the economic hose flopping all over the place. It’s why things are weird with baby formula, with gas prices, with airlines. That’s the hose flopping around. The hose is still flopping.

Related:


Today’s News
  1. Donald Trump took the Fifth Amendment and declined to answer questions from the New York State attorney general’s office in the investigation into his company’s business practices.
  2. Russian forces killed at least 13 civilians and wounded others in a missile attack in southern Ukraine overnight. Ukrainian special forces also reportedly carried out a strike on a Russian air base in Crimea yesterday, a move that would mark a significant escalation in fighting.
  3. The Justice Department charged a member of Iran’s Islamic Revolutionary Guard with allegedly plotting to assassinate John Bolton.

Dispatches

Evening Read
a black-and-white photo of a bat hanging in a cave
(Remus86 / Getty)

Hibernation: The Extreme Lifestyle That Can Stop Aging

By Katherine J. Wu

Today’s most elderly bats aren’t supposed to exist. Ounce for ounce and pound for pound, they are categorically teeny mammals; according to the evolutionary rules that hold across species, they should be short-lived, like other small-bodied creatures.

Read the full article.

More From The Atlantic


Culture Break
A collage of Adam Scott in "Severance" and photos of audiences wearing 3-D glasses
(Apple TV+ / Getty / The Atlantic)

Read. The Yellow House by Sarah M. Broom, a memoir set in New Orleans that has an incredible sense of place.

Or try another pick from our list of eight books that grapple with a hard childhood.

Watch. In the mood to solve a puzzle? Watch or rewatch Severance (Apple TV+) or Yellowjackets (Showtime)—but this time, try to follow along with fan theories on the internet, which play a bigger part in shaping modern TV than you might realize.

Play our daily crossword.

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Economy

The World Economy Is Slowing More Than Expected, a New Forecast Shows – The New York Times

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Economies around the world are slowing more than expected, as Russia’s war in Ukraine drives inflation and the cost of energy higher, forcing the Organization for Economic Cooperation and Development on Monday to scale back its projections for growth in the coming years.

Although it shied away from forecasting a global recession, the organization downgraded its outlook, maintaining its expectation that global economic growth would be a “modest” 3 percent this year, and an even weaker 2.2 percent next year, down from 2.8 percent a few months ago.

“The world is paying a very heavy price for Russia’s war of aggression against Ukraine,” said Mathias Cormann, the organization’s secretary general.

The organization lowered its growth forecast in virtually all of the 38 countries it represents, which include most of the word’s advanced economies. It projected growth of just 3.2 percent for China for this year and 4.7 percent for next year, one of the lowest rates for the country since the 1970s, said Álvaro Santos Pereira, the O.E.C.D.’s chief economist.

Comparing its current projection with one issued at the end of last year, a gap of about $2.8 trillion in foregone output for 2023 emerged, a figure that is roughly the size of the French economy. That represented the organization’s rough estimate of the economic toll the war is taking on the global economy.

“The global economy has lost momentum in the wake of Russia’s war of aggression in Ukraine, which is dragging down growth and putting additional upward pressure on inflation worldwide,” the report said.

Europe remains the most vulnerable region, with several countries facing the threat of a recession. Germany, the European Union’s largest economy, is projected to contract by 0.7 percent next year, after growing only 1.2 percent this year. Both France and Italy are forecast to see growth of less than 1 percent next year.

In the United States, projected growth was scaled back to 1.5 percent this year, from 2.5 percent forecast in June, and to 0.5 percent in 2023, down from 1.2 percent in the June report.

Soaring inflation, fueled by the high price of energy and food, is driving the slowdown and spreading to other goods and services, weighing heavily on households and businesses. The high cost of energy and the threat of gas shortages in Europe remain key risks, as countries head into winter with storage tanks nearly full, but with uncertainty about how long they will last.

“The risks are very much tilted to the downside,” Mr. Cormann warned.

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The world economy has an ominous August 2007 kind of feeling – Axios

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August 2007 was, on the surface, a fine month for the U.S. and global economy. Unemployment was low. The stock market had a few bumpy days, but nothing too dramatic.

Why it matters: Many consider it to be the beginning of what we now call the global financial crisis. And there are some ominous parallels with what the world is experiencing right now.

  • To be clear, we’re not predicting a new crisis as severe as the one that rocked the world in 2008. Rather, we’re arguing that major (and accelerating) underlying shifts are underway and likely to reverberate for years.
  • How significant the pain will be is hard to predict. It could vary significantly across countries and industries. It’s plausible that the economic damage in most sectors of the U.S. economy will be mild.

In this parallel, the tumult in Britain — where the currency and government bond prices are plunging — is the equivalent of when French bank BNP Paribas experienced funding problems due to mortgage losses.

  • The bank required a liquidity lifeline from the European Central Bank on Aug. 9, 2007, which many date as the beginning of the global financial crisis.
  • As it was then, the U.S. economy remains strong, and the financial disruptions across the Atlantic seem remote. But in that episode, they were in fact early manifestations of profound adjustments that were only beginning, and would eventually affect economies worldwide.

State of play: For a decade-plus after the 2008 crisis, the world was stuck in a low-interest rate, low-inflation, low-growth rut.

  • Central banks searched for novel ways to loosen monetary policy to stimulate demand, including negative interest rates and quantitative easing.
  • They concluded that the “neutral rate” of interest had become much lower, due to seismic forces like demographics and globalization.
  • The widespread view — reflected in bond prices and officials’ comments — was that after the pandemic’s disruptions passed, this low-rate normal would return. Until recently, at least.

What’s happened in the last few months — and with dizzying speed in the last several days — is that markets are adjusting to the possibility that the era of extremely low rates and liquidity is over, and the 2020s will be very different from the 2010s.

  • Consider that at the start of the year, a 30-year U.S. Treasury bond yielded 1.92%. That’s up to 3.62% as of 10:45am EDT this morning.
  • The effects of that repricing are only beginning to ripple through the economy. It’s most visible now in housing, but could eventually affect everything from the sustainability of large budget deficits to the viability of any business relying on lots of leverage.

Flashback: Donald Kohn, who played a key role in fighting the global financial crisis as the No. 2 official at the Fed, had some prescient comments last year.

  • “It’s possible that [the natural rate of interest] is higher than backward-looking models now suggest,” he said at the 2021 Jackson Hole symposium, noting loose fiscal policy and pent-up savings.
  • “But the transition to a higher rate environment could be pretty bumpy given that a lot of asset values and assessments of debt sustainability are built on very low interest rates for very long.”

What they’re saying: In a note out this morning, Joseph Brusuelas, chief economist at RSM, said that dollar funding markets have shown some of the strains they have in crises past (though not as severe.).

  • He writes that it is likely economies that have been “characterized by insufficient aggregate demand and low inflation over the past two decades, will now be characterized by insufficient aggregate supply, negative supply shocks, geopolitical tensions and higher inflation,” which require different monetary and fiscal policies.
  • “Fixed income markets are signaling a shift in perceptions of financial stability and raising a caution flag for investors,” he added.

The bottom line: We’re in the early days of seeing how a world of tighter money will play out across sovereign nations, real estate, the corporate sector and more.

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Energy, inflation crises risk pushing big economies into recession, OECD says – Reuters

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PARIS, Sept 26 (Reuters) – Global economic growth is slowing more than was forecast a few months ago in the wake of Russia’s invasion of Ukraine, as energy and inflation crises risk snowballing into recessions in major economies, the OECD said on Monday.

While global growth this year was still expected at 3.0%, it is now projected to slow to 2.2% in 2023, revised down from a forecast in June of 2.8%, the Organisation for Economic Cooperation and Development said.

The Paris-based policy forum was particularly pessimistic about the outlook in Europe – the most directly exposed economy to the fallout from Russia’s war in Ukraine.

Global output next year is now projected to be $2.8 trillion lower than the OECD forecast before Russia attacked Ukraine – a loss of income worldwide equivalent in size to the French economy.

“The global economy has lost momentum in the wake of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine. GDP growth has stalled in many economies and economic indicators point to an extended slowdown,” OECD Secretary-General Mathias Cormann said in a statement.

The OECD projected euro zone economic growth would slow from 3.1% this year to only 0.3% in 2023, which implies the 19-nation shared currency bloc would spend at least part of the year in a recession, defined as two straight quarters of contraction.

That marked a dramatic downgrade from the OECD’s last economic outlook in June, when it had forecast the euro zone’s economy would grow 1.6% next year.

The OECD was particularly gloomy about Germany’s Russian-gas dependent economy, forecasting it would contract 0.7% next year, slashed from a June estimate for 1.7% growth.

The OECD warned that further disruptions to energy supplies would hit growth and boost inflation, especially in Europe where they could knock activity back another 1.25 percentage points and boost inflation by 1.5 percentage points, pushing many countries into recession for the full year of 2023.

“Monetary policy will need to continue to tighten in most major economies to tame inflation durably,” Cormann told a news conference, adding that targeted fiscal stimulus from governments was also key to restoring consumer and business confidence.

“It’s critical that monetary and fiscal policy work hand in hand”, he said.

Though far less dependent on imported energy than Europe, the United States was seen skidding into a downturn as the U.S. Federal Reserve jacks up interest rates to get a handle on inflation.

The OECD forecast that the world’s biggest economy would slow from 1.5% growth this year to only 0.5% next year, down from June forecasts for 2.5% in 2022 and 1.2% in 2023.

Meanwhile, China’s strict measures to control the spread of COVID-19 this year meant that its economy was set to grow only 3.2% this year and 4.7% next year, whereas the OECD had previously expected 4.4% in 2022 and 4.9% in 2023.

Despite the fast deteriorating outlook for major economies, the OECD said further rate hikes were needed to fight inflation, forecasting most major central banks’ policy rates would top 4% next year.

With many governments increasing support packages to help households and businesses cope with high inflation, the OECD said such measures should target those most in need and be temporary to keep down their cost and not further burden high post-COVID debts.

Reporting by Leigh Thomas, additional reporting by Tassilo Hummel; editing by Richard Lough, William Maclean

Our Standards: The Thomson Reuters Trust Principles.

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