Worst of times: High inflation, anti-business mentality having us heading toward recession
This memorable opening line from Charles Dickens’s classic work A Tale of Two Cities seemed to be an appropriate place to start this op-ed regarding where our economy has recently been – and could be headed. That’s because the large amount of research I compiled for this article revealed dramatically different signals as to its direction and conclusion. Certainly, we had a strong economy followed by one of the worst quarters in American economic history from 2019 to the trough of the recent pandemic downturn in 2020. The Dickens quote, in my mind, can also be used to describe the Michigan and U.S. economy in a forward-thinking way: We’ve been experiencing very good times but unfortunately, many indicators are signaling that difficult times are ahead of us.
Last week, relatively positive data was released on the Michigan and U.S. economies. The Michigan economy in 2021 produced an annualized state GDP growth rate of 6.2%, outpacing the U.S. economy’s overall growth rate of 5.7%. Michigan was the 13th best-performing economy in the country and second in the Great Lakes Region, trailing only Indiana, whose economy grew at 6.9% last year. However, Michigan’s GDP for the 4th quarter of 2021 showed a decline to 5.8%, ranking it 28th nationally. Michigan retail sales increased in February, a positive sign for the Michigan economy after disappointing figures in December and January.
The employment picture in Michigan also seems to be improving with the state’s labor force participation rate reaching a 16-month high of 59.5% with 56.7% of the state population employed in February. The Michigan labor force is just now over 4.8 million people, the highest level in the state since September 2020, with almost 4.6 million people employed and only 228,000 looking for work. Even though one person looking for a job is one too many, 228,000 is a dramatic improvement from the almost 1.04 million Michiganders looking for work in April of 2020. A little bit more good news is that our unemployment rate has gone from a multi-year peak of 22.7% in April 2020, to 4.7% in February of this year. The trend for unemployment is certainly moving in the right direction for Michigan, yet it is more than one percentage point above the national unemployment rate of 3.6%. The U.S. economy fared equally well in 2021 in terms of job creation and economic growth. In fact, according to the U.S. Bureau of Labor Statistics (BLS) there are roughly 11 million jobs, many of them high paying, that need to be filled. Then why the parallel to A Tale of Two Cities? What could be the worst of times today and/or on the horizon? The answer is simple and unequivocally answered by the words inflation, regulation, and taxation.
The prediction of transitory inflation that would last mere months by the Biden Administration and the U.S. Federal Reserve Bank in March of 2021 has proven to be a pipe dream. Year-Over-Year, the February 2022 Consumer Price Index (CPI +10%) and Producer Price Index (PPI +7.9%) – key gauges of U.S. inflation – are at 40-year highs. With average 30-year fixed home mortgage interest rates increasing from 3% to 4.5% in the first quarter of 2022 alone, we believe bank mortgage interest rates could easily reach 5.5 – 6% by the end of the year making it difficult for many in Michigan and across the United States to purchase a new home. As one of my mentors Milton Friedman said, “inflation is always a monetary phenomenon.” Until the Federal Reserve stops funding massive government programs and substantially reduces the money supply (its balance sheet is now at $9 trillion) inflation will not slow. It will only get worse in the months and year ahead.
Early in 2021, President Biden signed more than 140 executive orders to begin his presidency, many of which undid President Trump’s moves to reduce the regulatory burden on the U.S. economy (something we applauded at the McNair Center). The Russian invasion of Ukraine and higher energy prices have further exacerbated the burden of increased regulation with mining for strategic minerals and coal, and especially petroleum and natural gas production. This regulation has made our economy more dependent on unfriendly foreign powers while increasing the cost of generating electricity, heating homes, and producing gasoline.
President Biden is mistaken concerning certain groups not paying one’s fair share of income taxes. If corporations are not paying income taxes, they largely must be investing in the economy and creating jobs, in order to generate the tax credits to do so. 2019 IRS data shows the top 1% of earners paid almost 40% of all personal income taxes. President Biden’s proposals to further tax wealthy individuals and corporations will not create prosperity in the United States…it will reverse it.
We believe high inflation and the anti-business mentality coming out of Washington, D.C. are the root causes of waning confidence in the Michigan and U.S. economies. The latest Atlanta Federal Reserve Bank GDPNow estimate model calls for U.S. GDP to come in at a disappointing 1.3% growth rate for Q1 2022 (data released at the end of April). Unfortunately, this is an optimistic figure when compared to a recent Q1 2022 GDP forecast by Goldman Sachs which downgraded their estimate to .5% growth.
Disappointing GDP estimates by the Atlanta Federal Reserve Bank and Goldman Sachs coupled with numerous months of poor performance from the University of Michigan Consumer Sentiment Survey, slowing trucking and transportation industry data and the recent inversion of the yield curve between Two-Year and Ten-Year U.S. Treasury Bond Yields leads us to believe that there is a greater than 60% probability the U.S. economy will be in recession by the summer of 2023 or sooner.
Unfortunately, worse times seem to be on the horizon.