Don’t Think of a Recession

The Pitch: Economic Update for July 28th, 2022

Friends,

In this newsletter, I use the term “our leaders” often as a kind of shorthand for the elected officials who create and establish policy. But in almost every state in the union, the office of attorney general performs the vital role of enforcing and interpreting policy.

A good attorney general can be just as important in building and reinforcing a strong state economy as any governor or state house speaker. Attorney General Bob Ferguson has been a force for economic good in my home state of Washington for the last decade, and I wanted to spotlight some of his recent accomplishments as a way to acknowledge the importance of attorneys general.

In 2020, AG Ferguson launched an initiative that took on no-poach agreements at franchise employers. Employers at McDonald’s, Jiffy Lube, Jimmy John’s and other national organizations forced employees to sign noncompete agreements that meant they couldn’t go to other stores in the franchise or same-industry competitors for higher pay — essentially killing competition that could result in higher wages for workers. A new independent academic study examined job listings at companies that were targeted by Ferguson’s push against no-poach agreements and found that “advertised wages increased by more than 3.3% specifically as a result of the initiative — a pay raise of $1,041.71 for workers employed by these corporations.” That’s millions of workers who received significant raises nationwide as a result of Washington’s push against no-poach agreements. And an Ohio staffing agency recently agreed to end non-compete agreements due directly to Ferguson’s actions, resulting in thousands of workers retroactively receiving higher pay.

Ferguson has also busted an alleged price-fixing conspiracy in the chicken industry, in which 19 poultry companies supposedly colluded to keep prices artificially high. The small price increases caused by that conspiracy could have cost American consumers hundreds of millions of dollars over the last decade, and now at least one of those poultry providers is settling with the state of Washington.

These are actions that produce significant economic outcomes for ordinary Americans — thousands of dollars in additional pay for service workers and millions of dollars for American consumers who have been squeezed by high prices at grocery stores. I point these stories out for two important reasons: First, they’re a reminder that when you vote in state elections, your attorney general selection can be just as meaningful as your vote for governor or congressperson. And second, passing good, middle-out economic policy doesn’t mean a thing without teeth for enforcement and holding bad actors accountable. If your state doesn’t have an AG like Ferguson in office, you should do everything in your power to make that a priority.

The Latest Economic News and Updates

How to respond to a week overstuffed with new economic indicators

It has been a ridiculously packed week of economic news. In addition to the Federal Reserve raising interest rates by another whopping 3/4th of a percentage point, jobless claims rising slightly, the news that consumer confidence dropped slightly in July, and today’s news that the Gross Domestic Product shrank by .9 percent in the last quarter, yesterday Senator Joe Manchin and Senate Majority Leader Chuck Schumer announced that after a year of on-and-off negotiations they had finally reached an agreement on a revived Build Back Better bill incorporating climate investments, expanded health care coverage, and a corporate minimum tax. Though smaller than the original BBB plan presented by the president, this spending bill — now renamed “The Inflation Reduction Act of 2022,” which is a killer title — would still have a huge impact on the vast majority of Americans.

In busy weeks like this, it’s important not to overreact to any one piece of news. The Senate has a way to go before it passes the Schumer-Manchin agreement — if in fact it passes at all. And as the Wall Street Journal notes, while some economists strictly define a recession as two or more consecutive quarters of shrinking GDP, the National Bureau of Economic Research uses a number of criteria to determine whether or not we have officially entered a recession, including “inflation-adjusted personal income and consumer spending, measures of employment, wholesale and retail sales adjusted for price changes, and industrial production.”

Many of those metrics are still going strong, including personal income:

and personal consumption:

We’ll continue to cover and analyze the repercussions of these announcements in the weeks to come, but a good rule of thumb in overstuffed weeks like this, when data points are flying everywhere, is from the titular universal travel guide featured in Douglas Adams’s 1980s sci-fi comedy novel The Hitchhiker’s Guide to the Galaxy: “don’t panic.” It’s best to keep an eye on the data as it comes in — most particularly the monthly rise and fall of employment and wages — but you should always remember to really focus on longer economic trends.

Are recession fears creating a recession?

Joe Rennisen at the New York Times reports that “Wall Street’s most-talked-about recession indicator is sounding its loudest alarm in two decades, intensifying concerns among investors that the U.S. economy is heading toward a slowdown.” That indicator is the yield curve, which tracks how people are investing in bonds — if they prefer long-term bonds over short-term bonds, that indicates investor confidence in the economy. If they switch to investing in short-term bonds, though, that indicates a weak economy on the verge of recession — and that’s what is happening now:

This week, the IMF cooled down its economic forecasts, warning that the global economy could be heading into a recession if inflation continues to grow around the globe. And Forbes headlined its current running tracker of layoffs “Here Are The Major U.S. Job Cuts As Recession Fears Grow.”

Every one of those indicators, it should be pointed out, come packaged with their own bundle of caveats. The yield curve is basically a poll of investor feelings, and not a direct one-to-one measurement of the economy. The IMF prediction has a number of uncertainties written into it. And the layoffs we’ve seen tend to be concentrated in tech companies that are either responding to changing consumer tastes after the pandemic (like with Shopify) or preparing for venture capital and investor cash to dry up in an expected recession, while unemployment in most other sectors continues to be fairly low.

Are we headed to a recession? Possibly. As we noted above, there are troubling signs in a few different places, though the labor market would need to cool considerably before we could truly recognize what we’re seeing as a traditional recession. But the media’s obsession with continually asking if we’re in a recession yet is absolutely not helping — it’s the equivalent of someone who feels vaguely sick taking their own temperature every few minutes and fretting over a change of a fraction of a degree. Because the economy is made up of people, it’s possible that if a critical mass of people act as if we’re in a recession, their economic behavior might tip us into a recession. We don’t want to worry ourselves into an economic downturn.

Mixed signals persist on prices

Walmart this week announced that they were cutting prices in order to drive consumer demand, and as a consequence the megaretailer warned Wall Street that upcoming profits could be smaller than expected. (Given that Walmart’s 2021 profits were just shy of $139 billion, I wouldn’t start a Gofundme for the Walton family just yet.)

But while Walmart is lowering prices for consumers, big brands like Coca-Cola, McDonald’s, and Huggies refuse to follow suit. “The executives behind these global brands on Tuesday said they would keep passing along those costs to shoppers, for now. Consumers are continuing to buy even as inflation takes a toll on households,” reports Connor Hart at the Wall Street Journal.

Other pricing signals are pointing in the right direction, according to Gwynn Guildford at the Journal:

Ed Hyman, chairman of Evercore ISI, pointed to many indicators that 9.1% might have been the top. Gasoline prices have fallen around 10% from their mid-June high point of $5.02 a gallon, according to AAA. Wheat futures prices have fallen by 37% since mid-May and corn futures prices are down 27% from mid-June. The cost of shipping goods from East Asia to the U.S. West Coast is 11.4% lower than a month ago, according to Xeneta, a Norway-based transportation-data and procurement firm.”

So there you have it: a smorgasbord of signals to choose from, with plenty of options for both pessimists and optimists.

The economy dipped, so America is bringing the chips

One of the biggest supply chain pressures we experienced over the last year or so was in computer chips. The global shortage of semiconductors has hurt the American economy in basically every way it could be hurt. The shortage has stopped new car production cold, it has tanked stocks, and it has left our military vulnerable.

But this story has a happy ending: Just yesterday, the Senate passed a bipartisan bill providing more than $50 billion in subsidies for American semiconductor manufacturers, as well as “about $100 billion in authorizations over five years for programs such as expanding the National Science Foundation’s work and establishing regional technology hubs to support start-ups in areas of the country that haven’t traditionally drawn big funding for tech,” report Amy B. Wang and Mike DeBonis at the Washington Post.

This is a big damn deal: The new bill supports domestic manufacturing, it addresses one of the biggest shortages in the global supply chain that’s driving up prices of cars and electronics, and it fosters the creation of new industries in rural parts of the country that have been left behind over the last half-century or so. And hopefully, bringing more tech manufacturing back to the U.S. will partly address my fellow Substacker Noah Smith’s fear that the American tech industry is drifting away from the creation of new technologies and toward senseless “financialization” which redirects Silicon Valley’s genius into payments, investments, and other fintech fads that just bilk money from American consumers.

The housing market makes no sense right now

I encourage you to listen to a recent episode of The Ezra Klein Show that features a long interview with Jenny Schuetz about her new book, Fixer-Upper: How to Repair America’s Broken Housing Systems. Schuetz correctly identifies the fact that America’s housing market is buckling under two distinct crises: First, housing prices in highly coveted metro areas have skyrocketed beyond the point of affordability for all but the wealthiest Americans.

And second, Schuetz explains that “the poorest households everywhere in the country spend more than half of their income on housing costs, and that leaves them too little money left over to pay for things like food and transportation and health care.” In rural areas, in other words, it’s not a housing problem but an income problem.

Conor Doughty and Ben Casselman at the New York Times point out that as the Federal Reserve raises interest rates and increases the prices of new mortgages by hundreds of dollars a month, there’s a serious housing supply issue, too:

Sales of new homes are falling — down 15 percent this spring from a year earlier — at the same time that a wave of homes, begun before the jump in interest rates, are hitting the market. The number of homes that have been completed but not yet sold hit a 15-month high in May. Redfin, the real estate brokerage, recently reported that buyers are trying to back out of sales agreements at the fastest pace since the early weeks of the pandemic.

Even as home sales decrease, home prices increased by nearly 20 percent from last May to May 2022, and mortgage payments are skyrocketing.

We were taught in Econ 101 that decreased consumer demand should lower prices, but as with most Econ 101 lessons, that’s not necessarily how the market actually works. For one thing, the housing market is complicated because we all need a place to live, and so buyers don’t really have any other options aside from renting or owning a home. And for another thing, there are a lot of rich people with a lot of money tied up in the market who are willing to sit on their empty homes for a couple of years until the market picks up again and they’re able to rake in those expected exorbitant profits.

This is where good policy should come in. Schuetz recommends housing vouchers for the lowest-income renters in order to get their housing costs down from half of their income to a more practical third, so that they have more money to spend in their local economies again. And new ideas like vacancy taxes and the elimination of single-family zoning could work to make the housing market respond to standard economic pressures, driving down prices to a more reasonable level. It’s clear that without outside action, the housing market will not suddenly decide to behave in a more equitable manner.

Real-Time Economic Analysis

Civic Ventures provides regular commentary on our content channels, including analysis of the trickle-down policies that have dramatically expanded inequality over the last 40 years, and explanations of policies that will build a stronger and more inclusive economy. Every week I provide a roundup of some of our work here, but you can also subscribe to our podcast, Pitchfork Economics; sign up for the email list of our political action allies at Civic Action; subscribe to our Medium publication, Civic Skunk Works; and follow us on Twitter and Facebook.

• On Civic Action Live this week, we’ll be exploring the latest flood of economic data, discussing Congress’s latest push to manufacture semiconductors here in the US, and explaining why the media’s over-emphasizing of recessions can actually cause a recession. Join us on Friday at 10:30 am PST.
• Anyone who follows economics likely understands that our tax code works out better for white families — it favors the kind of generational wealth-creation tools that white families have accessed for centuries, like homeownership. But in the most recent episode of Pitchfork Economics, Dorothy A. Brown explains that it’s not as passive as it sounds: Our tax code actively advantages white wealth and disadvantages Black wealth.
• In his Business Insider column, Paul explains that the American appetite to tax the rich has been growing steadily over the last decade — and as income inequality continues to grow, the number of Americans who want to tax the rich is growing.

Closing Thoughts

The AFL-CIO recently released their annual report on executive pay, and they found that CEO pay has now spiked to up to 670 times their average worker pay. This news arrives in a year in which, despite wage increases almost across the board, workers actually lost money due to inflation.

Aside from the obvious terrible economic effects of money being funneled up and away from the working class and into the pockets of a wealthy few, these outrageous numbers are also eroding the public trust. Increasingly, Americans believe that CEOs are grossly overpaid and corporate profits are too high. A recent Navigator poll found that a supermajority of Democrats and Independents believe that “Big Oil CEOs are using the pandemic and the war in Ukraine as an excuse to raise gas prices, gouge consumers at the pump, and make record profits while American families struggle.”

This erosion in trust is important. After a flood of stories about ballooning CEO pay, rising income inequality, and workers being systematically underpaid due to corporate collusion, Americans have been trained to associate business leaders with runaway greed. This is a new development in my lifetime — for most of the 20th century, Americans considered business leaders to be exemplary citizens, the kind of civic leaders who were looked up to and respected. But because you can’t ignore the evidence before your own eyes, that opinion has changed.

Business leaders should take this shift in public opinion as a warning. The American public’s appetite for taxing the rich has grown markedly in the last decade, and that appetite will likely not be sated until the public can perceive that the scales have been balanced in everyone’s favor. Just as executive paychecks are growing, so is the anger of the average American at the economic injustice that they see every day.

Be kind. Be brave. Get vaccinated — and don’t forget your booster.

Zach