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The State of the Economy: November 2023
the US Government needs to step up
2023 is going to be a good year for the US economy. Unemployment is low. Inflation is falling. The economy is growing. The worst thing about the economy, oddly enough is consumer sentiment. Although the indicators are pointing towards a good year and people are spending as if it’s a good year, consumer report they don’t feel good about the economy. Weird. This seems impossible, but consumer sentiment was higher in April 2020, when the economy was being shut down during the pandemic and unemployment neared 15 percent, than it is today. So what’s going on?
First, unemployment is low, but it is currently trending in the wrong direction. The unemployment rate spent over a year bouncing between 3.4 percent and 3.6 percent. This is fantastic! Similar to a person’s body mass index (BMI), unemployment can be both too high and too low. With BMI, people are frequently overweight, but can also be underweight. With the labor market market, the more common problem is that unemployment is too high. That means there are more workers than jobs. Rarely, however, unemployment can be too low; which means there are not enough workers to fill the jobs available in the economy. Anywhere between 3.0 and 4.0 percent is the Goldilocks zone - the amount of jobs and workers matches well.
Over the last few months, the labor market has been trending out of the Goldilocks zone. From July to August unemployment jumped from 3.5 to 3.8 percent. This by itself isn’t much of a concern. There is always some noise in the monthly statistics, so if September numbers would have fallen then perhaps the 3.8 percent August was just an outlier. Unfortunately, it’s looking less and less likely that August was a data blip. September unemployment was also 3.8 percent. October unemployment was 3.9 percent, the highest since January of 2022. To be sure, 3.9 percent is still wonderful. But three points make a trend, and the trend says unemployment is increasing. Could it reverse and decrease back to 3.5 percent or plateau at 3.9 percent? Absolutely. It also might continue to increase. Perhaps consumer sentiment is reflecting nervousness about the future.
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Inflation is a more likely culprit. While inflation is decreasing, it’s important to note that falling inflation means prices are not continuing to increase at the same rate they were. People often hear that inflation is decreasing and expect prices to also decrease. Sorry to be the bearer of bad news, but a significant price decrease back to 2020 levels is only going to happen if the US economy goes through a severe recession. An end of inflation doesn’t mean prices go back down, it means they plateau at their new highs. Consumers are rightly frustrated that a $100 trip to the grocery store no longer means the cupboards are empty; $100 is now just a normal visit. While economists and policymakers might be happy inflation is coming down, consumers will take time to adjust to the new price regimen.
Then there’s the deficit. As I wrote about previously, the deficit is something everyone should be paying attention to. Because the Federal government pumped $5 trillion worth of stimulus into the economy in 2020 and 2021 it caused inflation. Then, to fight inflation, the Fed increased interest rates. Since our government borrows so much money, this is causing major financial problems. As interest rates go up, inflation will come down, but borrowing costs for the government will increase.
In a government that functions well, there is a simple solution: stop borrowing so much money. With low unemployment, increasing GDP, and above-target inflation, it’s a no-brainer. Tax revenue has to increase, expenditures have to decrease, or there needs to be some combination of the two. This would decrease inflation because the government spending less will reduce the total amount of money circulating in the economy. The US economy doesn’t need a lot of deficit spending to help it along, in fact, the amount of spending is causing the one problem, inflation.
Of course, the US Government is not functioning well. There is not currently a party that is committed to any sense of fiscal responsibility. Usually, the Republicans can be counted on to be deficit hawks when the occupier of the White House is a Democrat, but today that isn’t even a sure thing. Instead, both parties are committed to spending trillions every year on Social Security, Medicare, and Medicaid, and neither party has a serious plan to pay for these programs. The result? Between September 2022 and September 2023, the deficit was a staggering 7.5 percent of GDP. That’s easily the highest deficit ever reached when the economy is healthy and the US isn’t at war. Half of 7.5 percent would still be too high. I agree with the unusually hard-hitting Economist, which this week called America’s deficit to be “jaw-droppingly reckless”.
Something has to give. Either increase taxes, decrease spending, or both. These changes need to be significant. Fiddling around at the margins ain’t gonna cut it. A change in corporate income tax or income tax only for the rich won’t be substantial enough. Taxes would need to increase on the top third of Americans at the very least. Those increases need to be significant. Same with cutting expenses. Shaving $100 billion off the defense budget or cutting aid to Ukraine isn’t meaningful enough. There needs to be a serious conversation about entitlement reform. No one will do so, though, because the first politician to do so will be out of office come reelection season.
Somebody needs to step up. This isn’t even about arguing for or against a proposed solution to the problem. It’s about admitting that there’s a problem to begin with.