It is the middle of July 2023 – and – the economic and stock market gurus and pundits that pontificate daily over various forms of media are still in “Cheshire Cat” mode, relating to the prognostication of economic flight paths and landing patterns along with the consequential stock market gyrations, with dueling fingers pointing in a multitude of directions. Their analysis most often makes sense in a microcosm restricted by minimal time and market dimensions. They accurately note that goods inflation is too high and that labor market strength has tended to make inflation sticky. They ponder whether or not the Fed will hike rates another two times. Hopeful Keynesians are crossing their fingers and suggesting that the economy should be able to withstand the possible occurrence of one or two more rate hikes this year, as suggested by the Federal Reserve, without triggering a recession. They see the headline CPI (consumer price index) figure at 3% for June (2023) and a favorable PPI (producer price index) report, and are confident that a new bull market will have legs. Their most salient fear is that the Fed will be too aggressive for too long and hurt the economy. Given the Fed’s history of missing the mark both on the way up and on the way down when reacting to inflationary risks, this fear is credible. Clearly, the stock market which is now going up at a steadily increasing pace, is likely to face a pull back even if inflationary conditions continue to improve. The stock market bulls are hoping that any correction will only be a minor correction of an overbought market and not a negative reaction to continued inflationary pressure.
Other gurus, looking at persistent, reckless government spending, a severely inverted yield curve, a tight labor market, core CPI close to 5% and unemployment at levels well below the Fed’s target rate to combat inflation (above 4%), envision a bumpier landing. They cringe at the fact that recent employment data indicates that government hiring constituted the largest sector of employment growth, all of which is being funded by deficit spending. Small businesses, which employ 60% of the workforce, are already being constrained by the shrinking supply of available funds for capital expenditures, and the promise of even higher cost of borrowing could be increasingly more destructive to the health of the economy. Small businesses seek funds for capital expansion from regional banks, which have virtually dried up. A majority of economic growth and overall employment is generated by small businesses and that is likely to become a critical issue as the Fed continues to hike the target interest rate. Market bears see that the sales of physical goods in real dollars having been negative for over a year, and fear that continued agenda driven federal deficit spending will keep inflation alive.
Both sets of pundits and gurus are correct, at least in part. What neither side seems to be doing is to “connect all the dots” relating to the bottom line – economic growth! The actual difference between an economy that barely escapes recession and one that barely goes into recession is minor and probably imperceptible to middle- and lower-income tax payers and small businesses who are struggling to keep their heads above water. The most likely outcome for the economy is not a soft or a hard landing, but rather a slow or no landing for an extended period of time. The bottom line is that the economy is virtually guaranteed to be mired down in a drawn-out period of little to no growth. This prospect of economic stagnation is reminiscent of the Obama period of little to no economic growth that was termed the “new normal” in an attempt by the left to get the voting public to accept the inefficiency of the socialist big government top-down capital decision making model (aka crony socialism – e.g., remember Solyndra).
This is to be expected whenever big government puts itself in the way of free market decision making and forces socialist central decision making on the economy. This affliction is not restricted to the present administration in the United States. Virtually all of Europe suffers from the same malaise as well as China. In fact, the Chinese economy has suffered the most from government interruption of the free market. Given the size of the Chinese population, low cost of labor, the willingness of the Chinese Communist party to abridge intellectual property rights, steal critical technology, and ignore any and all environmental guidelines, the Chinese economy should have been more robust and innovative than it is today. The crackdown on free market activity in recent years by the Chinese Communist Party has had a dampening effect on economic growth. Always keep in mind that communism not only seeks political and, therefore, economic control, it also strives for physical and thought control, all of which are diametrically opposed to the freedoms associated with the free market. Whether socialists believe it or not, any and all actions that constrain free market decision making, other than enforcement of rational guidelines (developed by legislatures) by the government as a referee and not a player, reduce the productivity and output of the economy and the freedom of producers and consumers to choose outcomes. Note that socialist leaning central decision makers who dwell in the regulatory arms of the government under the present administration love workers, but hate the employers that employ them. In the same breath, these left wing regulators hate profit, the major driving force of efficiency, productive growth and, ultimately, the real income of workers.