Economists’ expectations for a downturn in the next year are so high that the recent good news — the economy grew at a 2.6% annual rate in the third quarter — appeared with headlines bearing taglines like, “but recession risks loom.” Or “New GDP report shows an economic turnaround, but don’t be fooled.”
Yes, there is plenty of bad news to go around. Inflation is not, as the Federal Reserve assured us last year, transitory. Interest rates have surged, helping to snuff out the boom in real estate sales and dampen the historic two-year spike in prices. Home prices are still out of reach for most Americans, and apartments are scarce and expensive.
The cost of energy has soared, a direct and immediate tax on consumer spending and a major disruption in the world economy. The corporate darlings of the last decade — tech giants like Google (now Alphabet) and Facebook (now Meta) — appear to have lost their mojos, clocking huge declines (26% and 52%, respectively) in third quarter earnings due to soft advertising demand.
And yet there is another pile of evidence that suggests a recession, should there be one, could be mild. For starters, corporate profits in general are on a tear which, according to some analysts, is helping drive inflation.
Since 2020, corporate profits after tax have leaped to record highs, according to Federal Reserve statistics. The nonprofit Economic Policy Institute (EPI) calculates that corporate profits grew by nearly 54% from the second quarter of 2020 through the end of last year. That compares with an average of 11.4% a year over the previous four decades.
“This is not normal,” the EPI report states, adding that, “strikingly, over half of the increase can be attributed to fatter profit margins.” Over the previous four decades, unit labor costs contributed 62% to price increases. For the 2020-2021 period, labor costs added just 8% to the growth in unit prices. In other words, corporations were able to boost prices faster than their costs were rising.
For the average American, the price of gasoline may look scary on a zillion gas station billboards, but guess what? The cost of a gallon of gas is lower than it was in 1978, as measured in constant dollars, adjusted for overall inflation. The gallon that cost 67 cents in 1978 should today, after factoring in inflation, cost $4.63. But the actual price of gas in the US today is, on average, about $3.88. Plus, cars get much better mileage out of a gallon than in 1978, and there are now millions of electric vehicles on the road that didn’t exist back then.
With all the handwringing we read about in the news over the plight of the American consumer, here’s another statistic that rarely gets mentioned: the average real wealth of the middle class hit a record this year. According to data assembled at the University of California, Berkeley, the net worth of the middle class (home equity and other personal assets) peaked in March at $393,300.
The deflating real estate bubble has trimmed that number a bit since the spring and consumers are becoming anxious. Yet a recent Bloomberg News/Harris Poll found that middle-class Americans expressed optimism about their finances and about the future prospects for their children.
Finally, the employment statistics are particularly compelling because if there’s to be a recession, it won’t start the way the last major downturn occurred, after the 2008 mortgage crisis. First of all, the unemployment rate as measured by the Fed has fallen to a rate currently lower (3.5%) than at any time in the past 70 years. Nonfarm payroll employment has returned to pre-pandemic levels.
Secondly, there is a huge and growing segment of the population involved in the so-called gig economy — from dog walkers to Uber and Lyft drivers to former corporate employees who are now running small professional services businesses out of their homes. Estimates of how many Americans are working freelance, self-employed, and gig jobs range as high as 70 million.
That’s a huge sub-economy, much of which doesn’t show up in government statistics. Also, according to the Bureau of Labor Statistics, 4.7% of the US workforce (about 7.5 million people) were working more than one job.
What does all this tell us about the future? A mild recession? No recession at all?
Maybe 2023 will, in the rear-view mirror, remind us of what Canadian academic Laurence J. Peter wrote in his seminal 1969 book, “The Peter Principle: Why Things Always Go Wrong.”
He said, “An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.”
