As The US Economy Contracts, Privation Expands
The Recession Is Very Real And Very Present
Treasury Secretary Janet Yellen’s epic bit of economic ignorance the other day not only provides useful focus for understanding the extent of the current recession, it serves to illustrate how the delusional disconnects of the notional “experts” in and out of government manage to make things even worse.
Most economists and most Americans have a similar definition of recession: substantial job losses and mass layoffs, businesses shutting down, private sector activity slowing considerably, family budgets under immense strain. In sum: a broad-based weakening of our economy.
That is not what we're seeing right now when you look at the economy. Job creation is continuing, household finances remain strong, consumers are spending, and businesses are growing.
If her assessment of the jobs outlook, household finances, consumer spending, and business growth were accurate, there would be little to criticize here. Where there is job creation, strong household finances, robust consumer spending, and business growth, economic expansion is occurring by definition.
Unfortunately, none of that is actually the case—and the lack of all these elements not only establishes the US economy to be in recession, but illustrates how deep the recession already is and how much deeper it could potentially get.
How Much Actual Jobs Creation Has There Been?
As is so often the case, Janet Yellen’s error of fact arise from her (politically motivated?) cherry picking of statistical data while ignoring contradictory and often more compelling data sets.
If one looks at the just the total number of non-farm job openings in the US reported on the latest JOLTS report, it does appear that job creation is taking place. Even with month-on-month declines in the number of reported openings, that number is still considerably higher than it was pre-pandemic.
Taken at face value, these job openings represent jobs that are being “created”1.
However, despite the significant rise in job openings since the first quarter of 2020, the pace of hires and separations in the US has not changed much since before the pandemic and lockdown.
While the number of monthly hires is slightly above that for 2019, the overall trend is still very much horizontal and has not mirrored the job openings. Separations are likewise remaining mostly stable and steady, indicating little or no actual job growth.
Job growth would require an increase in hiring relative to prior periods, or at the very least a noticeable drop in separations relative to hiring. Neither of those trends can be seen in the data.
Robust job creation is further belied by reports of layoffs, both in June and since—such as Walmart’s announcement yesterday of cuts to its corporate workforce, which even the corporate media sees as a signal the job market is slowing and weakening.
Moreover, some economists see the declining numbers of reported openings as the early stages of a “whiplash” effect to the Fed’s interest rate hikes, as companies first cease recruiting, then cut back on hiring, and finally begin larger-scale layoffs.
“We are now in the early stages of a whiplash effect,” E.J. Antoni, a research fellow and economist at The Heritage Foundation, told the DCNF. “Employers are still scrambling to hire workers but will soon have to stop hiring and then begin layoffs; some firms have already started this move, but it’s not widespread yet.”
By just about every yardstick imaginable, the jobs market in this country is anything but strong.
Household Finances Are In Trouble
Yellen’s additional claim that household finances are strong is immediately shredded just by the inflation data alone. While wage growth prior to 2021 notionally kept pace with with inflation month-on-month, and throughout 2020 even exceeded inflation year-on-year, since early 2021 inflation has been steadily shrinking real earnings2.
As inflation forces consumers to pay more yet buy less, it degrades the real value of nominal wage increases across the board—and shrinking real wages are not a signal of household financial health in any context.
Wages increased 5.1% in the second quarter compared to last year, as companies try to retain and attract workers, The Wall Street Journal reports. Adjusted for inflation, incomes fell 0.3% in June compared to last year, the DCNF reported.
A further signal that household finances are deteriorating, as household debt in the US has risen to record levels.
Aggregate household debt balances increased by $312 billion in the second quarter of 2022, a 2.0% rise from 2022Q1. Balances now stand at $16.15 trillion and have increased by $2 trillion since the end of 2019, just before the pandemic recession.
Much of that rise has been fueled by a steep rise in credit card debt, which has all but erased the debt reductions households accomplished during 2020.
Credit card balances saw a $46 billion increase since the first quarter – although seasonal patterns typically include an increase in the second quarter, the 13% year-over-year increase marked the largest in more than 20 years. Credit card balances remain slightly below their pre-pandemic levels, after sharp declines in the first year of the pandemic.
Moreover, as researchers at the New York Fed observe, the increase in debt is being accompanied by an increase in debt delinquency, particularly among lower-income households.
With the supportive policies of the pandemic mostly in the past, there are pockets of borrowers who are beginning to show some distress on their debt. Upticks in delinquency transition rates are visible in aggregate, as seen on pages 13 and 14 of the Quarterly Report on Household Debt and Credit. When we break these out by neighborhood income using borrower zip code, we observe that the delinquency transition rates for credit cards and auto loans are creeping up, particularly in lower-income areas, as shown in the charts below. These rates appear to be resuming a trend in rising delinquencies among subprime borrowers that we had begun to see in 2019 in auto loans, where subprime borrowers retain a nontrivial share of the outstanding balances. We wrote about this topic even before the pandemic, and the return to these trends after two years of exceptionally low delinquency is noteworthy.
Households are sinking further into debt, largely as a result of rising inflation and shrinking real incomes, and are becoming increasingly unable to service that debt, with the lower income strata predictably showing the first signs of strain under their growing debt load.
Rising debt is also a signal of parlous household financial health, and rising debt delinquency is yet another such signal. Both signals run directly counter to Janet Yellen’s delusion that household finances are “strong”. They are not, and they are getting steadily weaker.
Consumers Are Not Spending More, Just Paying More
To reiterate a point I have made repeatedly, inflation’s damage comes primarily through its distortions of relative prices and the resultant economic signals. Thus while nominal consumer spending appears to be rising, the toxic impact of inflation means that actual consumption is actually decreasing.
One place this shows up is in the steadily rising levels of retail inventories in the US.
Inventories rise when retailers purchase goods for resale—and then cannot sell them.
When goods are not sold, consumption (and therefore consumer spending) has by definition declined, resulting in the somewhat paradoxical phenomenon of consumers spending more in nominal terms but purchasing fewer goods—literally spending more and buying less.
Nor is all consumer spending increasing even nominally. As interest rates have risen, so too have mortgage rates, and the resultant squeeze on prospective homebuyers has triggered steep declines in housing sales.
Signed contracts to purchase existing homes dropped 20% in June compared with the same month a year ago, the National Association of Realtors said Wednesday.
That is the slowest pace since September 2011, with the exception of the first two months of the coronavirus pandemic lockdowns, when sales plunged briefly and then rebounded sharply.
On a monthly basis, pending home sales fell a wider-than-expected 8.6% in June. A Dow Jones survey of economists had predicted a 1% drop.
Pending home sales have not merely fallen, but are in absolute free fall. Housing inflation and rising interest rates have pushed that many prospective home buyers out of the market.
When consumers aren’t buying, it is ludicrous to claim consumers are spending.
Businesses Are Not Growing
On her last point, Janet Yellen is simply wrong. Businesses are contracting, not growing, according to the latest S&P Global Purchasing Managers Index report.
The S&P Global US Composite PMI Output Index posted 47.7 in July, down from 52.3 in June to signal a renewed contraction in private sector business activity. The decline in output was the first since June 2020 and broad-based.
Across the board, US businesses are in trouble.
The Reality Is Recession. The Future May Be Depression
Contrary to Janet Yellen’s clueless commentary, by the yardsticks generally used to determine whether the economy is expanding or contracting, the US economy is not only contracting, but has been contracting for quite some time, even as inflation runs rampant. Slow growth or even no growth plus high inflation is what economists have termed “stagflation”. It’s what we have happening today, and it’s what has been happening—even by Secretary Yellen’s own criteria.
The economy is contracting, and privation is expanding. That is the clear signal provided by the government’s own economic data.
Moreover, with the Federal Reserve Hell bent on further rate hikes, driven almost entirely by the highly questionable jobs numbers, the current stagflation is only going to get worse. Remember, the Fed’s plan for fighting inflation is to drastically reduce the purchasing power (and employment) of ordinary individuals. They have said this repeatedly, and their rate hikes to date strongly suggest they be taken seriously on this point.
How much worse will it get? That depends largely on how much further the Fed hikes rates. With job openings and hiring on the decline, with consumption on the decline, and with business output on the decline, the impact of additional rate hikes on the overall economy is not going to be at all benign. The Fed’s stated goal is to make everyone a little bit poorer, and so force inflated consumer prices to come down—and given the lack of awareness on display by all of the “experts”, the probability that the Fed will make everyone a lot poorer instead is significant and growing.
The inescapable reality is that the job market was never that robust, and inflation has been driven less by excess consumer demand and more by inadequate supply, as the dislocations catalyzed by the 2020 lockdowns continue to ripple through the economy. The Fed is deploying its inflation-fighting machinery based on a faulty reading of the government’s own data—no good is going to come from this.
We’re in a recession already. If the Fed makes good on its rate hike pledges, we may very well find ourselves in a depression. Even if the Fed doesn’t make good on those pledges, this recession is on course to get much deeper and last much longer than the experts or the markets realize.
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With the labor force participation rate still very much below where it was prior to the pandemic lockdowns, a substantive argument can be made for considering any jobs filled to be jobs “replaced” rather than completely new jobs created and added to the economy.
While the extent to which inflation is eroding real wage gains is dependent upon the inflation gauge one uses, with all metrics the trends are the same: real wages are being eaten alive by inflation.