Chris Tomlinson: The U.S. is likely in a recession; here's how we speed up the next economic boom
TRIBUNE CONTENT AGENCY 9:16 AM ET 8/1/2022
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Aug. 1—If we're not in a recession now, we will be in one soon enough. Let's get on with it.
The United States has suffered two consecutive quarters of decelerating economic activity, which the London-based Financial Times says is a technical recession. Partisans can argue the technicalities all they want, but what counts is how Americans feel, and this high-inflation economy is not working for them.
The Conference Board reported Tuesday that consumer confidence in July slipped 2.7 points from June.
"As the Fed raises interest rates to rein in inflation, purchasing intentions for cars, homes and major appliances all pulled back further in July," said Lynn Franco, senior director of economic indicators. "Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months."
Unemployment insurance claims are also on the rise, casting a shadow on the strong labor market.
The White House can quibble about waiting for the National Bureau of Economic Research to decide. But as the official arbiter of business cycles, the NBER needs months of data to determine whether a significant decline in economic activity has spread across the economy. We can't wait for that.
For most Americans, a recession begins when they start worrying about losing their jobs because business is slowing. Even if the NBER says we haven't entered one, most Americans agree this the weirdest economy ever and not in a fun way.
Recessions, like death and taxes, are an inevitable part of the capitalist business cycle. Businesses grow, consumers buy things, everyone takes out loans and soon a portion of them are not repaid. Businesses falter, consumers lose jobs, banks slow their lending and the economy contracts.
Walmart (WMT) fired a warning flare last week, saying weakening consumer confidence is hurting their profits, with expected annual earnings down 11 percent. Wall Street analysts have lowered earnings expectations across the S&P 500 index of publicly traded companies.
The International Monetary Fund also lowered its global economic forecast for 2022.
"Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while U.S. consumer spending undershot expectations," IMF economists explained. "Several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide ... a worse-than-anticipated slowdown in China, reflecting COVID-19 outbreaks and lockdowns; and further negative spillovers from the war in Ukraine."
Significant economic growth is unlikely until China loosens COVID lockdowns or Russia stops fighting in Ukraine. But businesses, consumers and policymakers don't have to wait for them to fight inflation and lay the groundwork for an equally inevitable return to economic growth.
While it pains most Democrats, Sen. Joe Manchin of West Virginia had a point about how government spending contributed to inflation. First with President Donald Trump's reckless tax cuts and then President Joe Biden's extravagant pandemic relief packages, the government literally put cash in American checking accounts, a textbook method for triggering inflation.
The Federal Reserve is taking away the punchbowl by raising interest rates, as they did on Wednesday. The central bank's only way to slow inflation is to reduce demand by making money more expensive to borrow.
Reducing demand means slowing the economy, and in most instances, that means a recession. It's not the end of the world, it's perfectly normal, the question is how to move through it quickly.
Not all government spending causes inflation, and federal spending is critical to ending a recession. Investments in roads, bridges, transmission lines, electricity generation, housing, clean water and other big projects have always created jobs, reduced inflation and ended recessions.
The difference is the money is spent slowly, over years, in return for tangible products that add value. Improving roads reduces the cost of transportation. Providing new sources of energy brings down costs. Adding more homes makes the housing market less expensive, and so on.
Big projects create demand for skilled labor. Low-wage workers who lose jobs during a recession have an opportunity to professionalize into better careers.
Raising taxes also fights inflation, though in an unpopular way. People and businesses who pay more to the government do not spend that money in ways that drive up prices.
For all these reasons, the Democrat's Inflation Reduction Act of 2022 is not your typical boondoggle. The spending anticipates the coming recession and seeks to power the nation beyond it.
A recession is not the end of the world. The business cycle will complete its course, and the economy will grow again. It's the economic circle of life.
Tomlinson, named 2021 columnist of the year by the Texas Managing Editors, writes commentary about money, politics and life in Texas. Sign up for his new "Tomlinson's Take" newsletter at
HoustonChronicle.com/TomlinsonNewsletter.
twitter.com/cltomlinson
chris.tomlinson@chron.com
