The US economy is officially in recession after two consecutive quarters of falling GDP (R-E-C-E-S-S-I-O-N, Mr. President). Even worse, one year of rising prices on top of his slowing economy means Joe Biden is the first president since Jimmy Carter to cause stagflation (S-T-A-G-F-L-A-T-I-O-N, sir). Now, the Fed must raise rates high enough to halt runaway inflation, even if it means recession.
Inflation is the greater economic evil; having already hurt supply chains, labor markets and housing. A recession is one surefire way to clean up the mess (including a check on the Biden agenda).
Normalize The Supply Chain
COVID turned the global supply chain into chaos: lead times doubled, buyers accepted whatever they could get, and sellers became habitual price-increasers. This created a “sellers market” that’s unsustainable. Fortunately, recessions load-level consumption (less demand) and production (more capacity); thereby restoring predictability (reliable delivery) and support (ever-improving value propositions) to the chain.
The chain was crushed in March 2020 by cancellations, ballooned four months later with outsized orders, and became in 2021 the worst “sellers market” I’ve ever seen. This recession is an opportunity for factories and haulers to find capacity, importers and retailers to generate demand, and competitive buy-sell environments to return, which is what made inflation obsolete under Reagan.
The leading edge of this recession is doing just that. Since May, retailers have refused surcharges and importers have moved production, and (suddenly) haulers need loads and factories have capacity – a sure sign the chain is returning to historic norms. To wit, CNBC reports ocean freight rates fell 15% last month. Further, most executives tell me third-quarter demand is down from the first half of 2022, so the correction is just getting started.
Halt the Great Resignation
The unexpected consequence of COVID relief was the “Great Resignation” hitting in 2021, when workers found themselves in extraordinary compensation circumstances. The seeds were sown in spring 2020 ($1.3 trillion worker supplement) and winter 2021 (another $1.3 trillion). It wasn’t needed after three years of rising wages, and Biden was warned he was inviting lay-outs and walk-outs. And, when unfilled jobs rose (see chart below) and employers ached, this president condescended, “Pay them more.”
The USBLS data shows “quits” falling, but the 12-month average (4.3 million) is still above pre-COVID norms, and job openings haven’t normalized. There are too many unfilled jobs because too much stimulus invited job-hopping and an anti-work movement. This is disastrous; an economy can’t be exceptional with inexperienced workers or dynamic with understaffed businesses.
If the Fed raises rates high enough, the economy can slow and drive unemployment north of 6%. That should return competitive employer-employee balance to entire industries (if Republicans stop the free money president). Gainful jobs are good for the economy. Disloyal and inexperienced employees are not.
Make Millennial Homes Affordable
It is not in the public interest for 73 million millennials – the future of America – to spend too much on their first homes, because they are also starting families. Thus, it is the worst time to have runaway inflation in housing. Nationally, home prices rose 20.2 percent year-over-year in May, and rents rose over 10%. It gets worse: the Bureau of Labor Statistics reports rent inflation for new tenants has doubled in the last year.
These couples are just getting started, and they’re forced to waive pre-closing inspections (dream homes don’t have ticking time bombs). That’s wrong, and so is accepting a lesser home and having less money to raise one’s family. Don’t get me started on the costs of furnishing and re-modeling a first home. Millennials need a recession to scare sellers into “reasonable” asks, reduce home-building costs, and buy appliances and furnishings at “half price” sales.
Return Bipartisanship to Washington
President Biden and congressional Democrats ruined an improving economy by trying to create their new economy too fast. The result is $4.44 petrol, huge deficits, lower workforce participation rates, more days lost to strikes, a screwed-up supply chain, record flight cancellations, retail stock-outs, and China convinced the USA is about to fold.
Recessions have consequences (see Carter and Bush), and voters know who caused high gas prices and called inflation “transitory” last year. They know which party prolonged business shut-downs and paid workers to stay home. Only divided government can stop the insanity, and recession fears are the best way to put gavels back in GOP hands to check Biden and muzzle Pelosi. That alone will restore business confidence and boost markets.
Stop the Insanity
Suffice it to note the USA has endured one shock after another for twenty years. The 9-11 attacks and trillions wasted on regime-change wars. The Great Recession and Obama’s non-recovery. The Great Division under Trump. Biden killing energy independence before Putin invaded Ukraine. Through it all, there was no great president. America needs change – and recessions invite change.
In the late seventies, America’s next great leader (Reagan) was preceded by England’s next great leader (Thatcher). Can history repeat itself? Because the UK’s Conservative Party just ousted Boris Johnson, Democrats are uniting against a second Biden term, and fewer Republicans want a Trump repeat. I hope the Tories pick a winner.