Being from a blue-collar background with little residual income in my teens and twenties, I learned to work on my own cars whenever something broke. If I was to get to school or work the next day, I needed to repair whatever was wrong. I learned early on that besides the right quality part, using the right tool for the job was critical to success.
Over the past month and including the most recent week, we have seen many economic reports that provide a unique picture of not only the US but the world’s financial position. The most recent second quarter GDP number is slightly negative. On its face that conforms to the idea that the US is in a recession. The numbers also point to Europe and Asia being in regional recessions as well.
In the credit classes I teach I clearly discuss both quantitative and qualitative analysis. Quantitative analysis is the numbers, did they go up or down? I share that if all you want is a quantitative discussion, we can hire third graders, they recognize when numbers change. The key to understanding is the qualitative analysis, getting behind the numbers to figure out what is creating them.
This is where the idea of using the right tools comes into play. Past recessions were typically led by a decline in demand led to significant job reductions. These were demand/inflation led recessions. The tools to fight these recessions were to raise interest rates to further dampen demand until the inflation was wrung out of the economy. The pain for workers was immense.
When we get behind the numbers, we see some very different issues arising. On Tuesday the consumer confidence report for August produced a much higher than expected level. Personal income continues to increase, not as much as inflation, but stronger than in prior recessions. Real consumer spending the second quarter rose by 2%, unheard of during a recession when most people cut back. Personal spending in August rose above expectations by .4%. I can guarantee you this was not on back-to-school purchases as inventories at most retailers are still gathering dust. Durable goods purchases in August did decline by .2%. This was driven primarily by an 18% decrease in non-defense aircraft. Other areas, including consumer durable goods actually rose but were overwhelmed by the aircraft impact.
The job numbers are also stronger than expected with fewer layoffs occurring. We are also seeing a drop-in long-term unemployment as people continue to find jobs, if they want them.
Taken together, these numbers do not reflect a traditional recession. However, the Fed is moving along a path, using traditional recession tools to fight a recession that is very different, using the wrong tool for the job. When I used a hammer to loosen a bolt, the result was more work and problems to fix. The same is likely going to be said for this recession. They are going to break things that might take years to fix. On top of that, the core issue of supply will not be corrected, leading us into years of economic problems. We might be seeing the early signs of areas that are breaking already.
This recession is a supply chain caused recession. If you fix the supply chain, there will be adequate products produced to bring the scarcity caused price increases back in line. You do not fix a supply chain with increased interest rates. The current level of demand is fine, the consumer just needs to find the product they want to purchase. It just is not available in many cases. The right tools here are to look carefully at the levels of regulation that are in conflict with the efficiency and production of goods. Re-assessing unemployment benefits and programs that incent people not to work. How about targeting subsidies toward industries that produce and need people? Investment in infrastructure that will enhance efficiencies in our processes and transportation areas?
Sadly, this past month has already seen the possible start of the problems the higher rates are producing. The September Fed reports from Richmond, Dallas and others are turning down reflecting a softening of manufacturing. Discretionary spending is softening, travel is going down and housing is already taking a hit. Yet nothing that is being done is positively impacting the core of our issue, the supply chain.
A good way to summarize our current economic condition, we are in a unique recession that is not caused by demand but rather by the inability to sell what you do not have. If you fix that, we will get back on track.
Have a great week.