As I spelled out in a previous paper “Recession, Definition, Redefinition”, I refuse to blindly accept the gurus’ at the National Bureau of Economic Research (NERA) determination of recession as a ‘one size fits all’ exercise, especially when extremely high inflation heavily impacts a significant portion of the population. It appears as though they look at empirically high employment levels without considering the diminution of real incomes of fully employed and part time wage earners from their viewpoint. Wage earners and retirees living on fixed income have been clobbered by the ‘four decades high’ inflation that we have experienced this year. Many have had to radically modify their pattern of consumption and many have run up substantial credit card debt. For a vast majority of the middle and lower income wage earners a recession started early in 2022. Since March of this year (2022) the Federal Reserve has been fighting inflation, with its Keynesian bifocals on, by aggressively increasing the federal funds rate on a regular basis. Given the limitations of their tool box (ignoring all possible supply side remedies), they have only their interest rate weapons and the ability to contract the money supply via the reversal of quantitative easing (quantitative tightening) to force inflation down to their target rate (approximately 2%). Note that out of control spending by the Biden Administration coupled with totally unnecessary quantitative easing (purchase of securities by the Federal Reserve which, in effect, increases the amount of money in the banking system) were the direct cause of the highest inflation in forty years. See the paper referenced above for a more complete discussion of these issues.
As the economy slows in reaction to the Fed’s actions inflation will slowly subside, but that will also be accompanied by an increase in unemployment and the probable stagnation of wages. The pundits are projecting a likely recession in 2023, and of course, all of their “fingers are crossed” that the Federal reserve can execute a soft landing. If the out of control spending by the Biden Administration had not occurred and if the Federal Reserve were not “late to the party” regarding inflation, there would not be an inflation problem. It is a leap of faith to believe that the Federal Reserve, with the Biden Administration doing everything in its power to spend lots of money on its “green agenda” while continuing to strangle domestic oil and gas production, will now be perfect in its execution and that they will perform a “miracle on Wall Street”. Unfortunately, even if the Federal Reserve can “thread the needle” and execute a soft landing in 2023, there may be some hope for select sectors of the economy to escape some of the pain of recession, but there is little hope that the middle and lower income wage earners won’t “take it in the shorts” once again.
One of the dominant “wild cards” driving the inflation and recession dilemma faced by middle low income are the prices of fossil fuels and crude oil products such as gasoline, heating gas and oil, and petrochemical products. The wellbeing of middle and lower income wage earners is far more impacted by the high cost of fossil fuels because their unavoidable expenditure on the fuels and byproducts is a much larger portion of their total income than the members of the “political elite” who have waged war on fossil fuels. The volatility of crude oil prices on the global level, with United States domestic producers being blocked by the Biden Administration from being the swing producers and global price setters, makes the projection of the prices of these fossil fuels and byproducts a treacherous endeavor. Although there has been a recent drop in the price of crude oil it will have legs only if most of the following factors hold:
The Chinese government continues its aggressive covid related shutdown
The Biden Administration modifies its war on fossil fuels
The Ukraine war comes to a timely conclusion
The Federal Reserve reverses its present rate and quantitative tightening policies
The OPEC cartel does not cut production targets to maintain price levels
The 2023 winter in Europe is exceptionally mild
The moment global economic growth starts to pick up (primarily China) the demand for crude oil and natural gas will increase significantly putting upward pressure on the prices of all goods. It is indicative that a majority of the analysts who concentrate on the oil and natural gas markets project oil and natural gas prices to be at or above the present level. A good indicator of the overall supply and demand balance in the oil market at the time of this posting is that the prices of oil stocks appear high relative to the price of oil. This indicates that either the prices of oil and gas stocks are all too high or that the global price of crude oil is too low given the markets short run reaction to events such as lockdowns and protests in China. Given the market power of the OPEC cartel, to whom Biden ceded the ability to set global prices, the odds-on favorite is the latter. Keep in mind the cost of crude oil impacts every good and service in the economy and crude oil prices can be expected to be significantly higher in 2023 unless the Federal Reserve totally ‘tanks’ the economy.
Regardless of whether inflation or recession (or both – stagflation) is in the cards for 2023, the sectors of the American population most severely impacted by the present negative agenda economic environment are the middle and lower income wage earners. Maybe the pundits at the NERA will find an esoteric reason to declare a soft landing and perhaps a minor recession in 2023, the middle and low income wage earners will have suffered through a difficult and unnecessary double dip recession