Michael Busler: A recession + stagflation are inevitable

President Biden recently issued a one-word statement that explains his understanding of the economy today and where he expects it to be in the near future. Recently, when asked if a recession for the US economy was inevitable, he simply answered, “No.”

Unfortunately, our president is wrong.

Not only is a recession inevitable, but stagflation is also starting to seem inevitable.

The first quarter of this year saw a negative gross domestic product (GDP) growth rate of 1.5%, even though nearly 1.7 million jobs were created. For the second quarter, job growth will slow, but most economists are forecasting growth in the 2-3% range. However, if they are wrong and the second quarter also shows negative growth, that would be the classic definition of a recession.

Incidentally, the reason for the strong job growth and negative GDP is that productivity was minus 7.5%. This means that the economy added about 1% more workers, but despite the increase in the number of workers, the country saw a 7.5% drop in the amount of goods and services produced.

Even if the second quarter growth is positive, the third and fourth quarters could show very weak or even negative growth. The reasons to see are relatively obvious.

Inflation will likely hit double digits by mid-summer. The monthly Consumer Price Index (CPI) figure for May, released in June, will exceed 1.0%. This will bring the annual inflation rate to nearly 9%.

Food inflation is about to get worse. This is because farmers pay two to three times more for fertilizer. Moreover, they had to raise wages to attract enough workers. And the cost of diesel fuel to run their equipment has doubled.

Add to that the reduction in wheat and other grains due to the Russian invasion of Ukraine, and food prices this summer are bound to soar.

At the same time, the Federal Reserve is finally changing its outrageously irresponsible monetary policy. Because Fed officials are about a year behind in action, they will need to take very aggressive action to bring inflation down. They will do this by slowing the growth rate of the money supply and raising interest rates through increases in the federal funds rate.

In June, the Fed will raise rates by 50 basis points (bps). In July, probably 75 BPS and possibly up to 100 BPS. Mortgages, car loans and consumer credit will become much more expensive as a direct result.

As consumers spend more on basic necessities, they will have less to spend on everything else. This reduction in demand will eventually reduce business output and lead to a recession. Many indicators are already pointing in this direction.

The huge, almost bearish drop in stock prices that has occurred over the past two months could mean that investors are seeing future corporate earnings shrink. If they expect corporate earnings to decline, stocks will be worth less, prompting investors to start shying away from price-to-equity valuations and only be willing to pay less. In a recession, corporate profits fall.

Usually, increases in personal income exceed the rate of inflation, so consumers see a real increase in purchasing power. Today this is no longer true, so consumers are seeing their purchasing power and their standard of living drop. This usually happens in a stagnant economy.

Retailers’ profits decline even as their revenues increase. This happens when their sales increase by 8%, but their costs increase by 11%, which is the rate of the Producer Price Index (PPI). If retailers cannot pass on price increases, the resulting loss forces them to cut production, often leading to a recession.

Job growth is not a good indicator of economic growth right now. Indeed, the increase in the number of workers is not due to organic job growth, but rather to the replacement of jobs lost during the pandemic. Even though the economy today produces more goods and services than before the pandemic, it does so with fewer workers.

The increase in employment will continue until businesses have the number of workers they had before the pandemic. But the economy will hit that point in a month or two, which means job growth will slow.

This means, of course, that while the President may boast of having created 8 million new jobs, he really hasn’t created any “new” jobs.

Because 1.) energy prices will continue to rise, 2.) wages will rise with inflation, 3.) the feds continue to run huge deficits, and 4.) the Fed lags far behind. the curve, inflation will be there with us for the foreseeable future. Add to that the coming food shortage and inflation will get worse.

If the administration and the Fed cannot bring down inflation as the economy goes into recession, stagflation is unfortunately the inevitable result. At this point, perhaps it seems inevitable too.

Michael Busler is a public policy analyst and professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written opinion pieces for major newspapers for over 35 yearss.

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