Why I’m eager to return to an economy that follows the rules

By Joe Higgins, YSN Contributor

In baseball, the rules have not changed in over 100 years; if you hit a ball to center field, you run to first base, not third base.

Yet our economy no longer follows the rules of my old college textbooks, and the reactions to information on the macro or micro level are somehow different today than they were just three or four years ago.

When I watch Bloomberg business news, I get the feeling that we no longer follow the old, prescribed ways. For example, the strong jobs report in November did not send the Dow higher; instead, a good report takes the markets lower. Likewise, consumer confidence is falling rapidly, which usually implies less spending, although retail sales and consumer spending are up.

It’s not supposed to work like this; the way the economy functions is different today.

Last year’s gross domestic product (GDP) started with two negative quarters in a row and economists were down in the dumps. Some even called it a recession. Then the Q3 numbers came in at 2.9% and we were back in the hunt. As I write this, the Atlanta Fed’s GDPNow numbers call for a Q4 increase of 2.8%.

It is possible that 2022 could wind up with an increase in GDP, so here is my dilemma: The big banks and leading economists are predicting a recession this year, but that is inconsistent with today’s indicators. Unemployment is at 3.7%, consumer spending is still solid and GDP is moving higher … so how can we be entering a recession?

Here is part of the problem: In March 2020, the government spent $2.2 trillion on the first Cares Act and then added another $900 billion in December. Then three months later the American Rescue Plan Act was passed, costing an additional $1.9 trillion. That is $5 trillion in stimulus that went to consumers and businesses, a sum never before seen in U.S. history. By way of comparison, at the height of the Great Recession in 2008, Congress only passed $787 billion for recovery efforts.

What could go wrong? That $5 trillion created dozens of anomalies that caused all these odd economic indicators to go haywire. For example, Americans have historically saved about 7% of their income. In 2020, our citizens, with help from the stimulus money, increased their saving rate to an average of 15%, with some months rising as high as 25% and 35%. The cash was so excessive that consumers were still using this stash of dollars from 2020 to buy goods and services in the 2022 economy.

This is clearly not like football. The NFL has rules; cross the goal line and it’s a touchdown. 

Here are some other broken economic rules: In April 2020 alone we lost 21 million jobs, unemployment hit 14.8% and thousands of businesses closed. COVID-19 shut down the government, and with no economic rules to account for a global pandemic, America suffered.

I think the Fed could push us into recession this year if interest rates continue to rise and job losses escalate. But because all the rules have changed, it is also possible that businesses that have dealt with three years of staff shortages will be reluctant to lay off workers. In a normal economy with historic rules this would be unthinkable.

Inflation, steady for the last 30 years at around 2%, was suddenly at 9.1% in June 2022, then down to 7.1% by November. Gas prices at my home in Washington rose from $2.99 a gallon two years ago to $5.99 last May. Last month I bought gas for $3.49. Unfortunately, inflation has no rules; one day it’s up and the next it’s down. 

Does anyone recall the price of 1,000 board feet of lumber in May 2021? It was $1,356. Today it is $410. Was it a classic case of supply and demand? No, the pandemic took down sawmills, increased demand for new housing and home remodeling took off. It was the pandemic that triggered the classic supply and demand issues. Pandemics were never included as a cause for inflation when I was in college. The rules changed in 2020.

What is it that brought us to this place? Three years of COVID, supply chains in chaos, massive stimulus, the war in Ukraine, inflation spiking and the rapid drop in housing prices have created an economy where rules are an anachronism. 

If you are eager to return to the old fashioned rules of the economy that we have lived with most of our lives, then buckle up. I am hopeful that one day the rules will return to normal again, the same way the NBA still gives three points for shots beyond the arc — because those are the rules. Inflation will ease, the Dow will rise, interest rates will drop and it will be Christmas again soon.

It all gives new meaning to that line from “Rocking Around the Christmas Tree” —”Everyone dancing merrily in the new old-fashioned way.” That is truly a metaphor for our economy. 

Here, though, is one thing that will not change: I wish you all a Happy New Year.

Joe Higgins is a 46-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.

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