A U.S. economic recession is increasingly likely and could be a potentially treacherous path toward curtailing soaring inflation and record-high gasoline prices.
The May Consumer Price Index showing an 8.6% inflation rate and record high gasoline and diesel prices across the country are fresh economic cannonballs across the bow of the Federal Reserve, Biden administration and Wall Street, according to economists.
“The likelihood of a soft landing is declining and the likelihood of a hard crash is increasing,” said Curtis Dubay, chief economist with the U.S. Chamber of Commerce, of the current economic trajectory.
The harder landing is already front and center for investors feeling the brunt of declining stock markets and increasing numbers of American households struggling with high prices throughout the economy. Inflation hits lower-wage workers and lower-income households the hardest reducing their buying power and ability to pay their bills.
For investors, the Dow Jones Industrial Average, S&P 500 and Nasdaq are down 16.6%, 21.8% and 31.7%, respectively, so far this year as of June 13. The four-decade highs with inflation include higher prices for housing, groceries and scores of items and services ranging from coffee, new and used cars and dry cleaning to health care, meat and bread prices.
“This is unprecedented,” said Joel Griffith, a research fellow and economics expert for the conservative Heritage Foundation, of the economic situation and the monetary and fiscal policies that have helped propel rocketing inflation.
“We might already be in a recession,” said Griffith of the challenges. The U.S. economy contracted by 1.5% during the first quarter. Two consecutive quarters of negative growth translate into a recession.
The Producer Price Index, which gauges inflation at the wholesale and production levels, was released Tuesday, June 14, and shows prices are up 10.8% since last May.
Higher interest rates
The Federal Reserve has already raised interest rates by 0.50 basis points in May and 0.25 points in March. The central bank could hike the prime lending rate another 0.75 points at its June 15 meeting.
Higher rates target inflation but also make home mortgages, car and small business loans higher — and that could hasten a recession and slow down.
“I'm sure nobody at the Fed would phrase things that way, but tightening up on monetary growth to slow inflation does put a damper on the economy, so we can expect slow economic growth, and a recession is likely,” said Randall Holcombe, an economics professor at Florida State University.
Holcombe said a best-case scenario could be slowdown without a major increase in the unemployment rate. The U.S. jobless rate is currently at a 3.6% with many employers struggling to hire and retain workers especially in lower-wage job with limited medical and retirement benefits.
The worst-case scenario would be a prolonged recession, job losses and continued and persistent inflation.
Griffith said he’s already seeing some indications of employers and recruiters slowing down on hiring. “I think we are at an elevated chance of seeing a period of higher inflation and the economy shrinking,” he said.
The economic troubles also overhang over the midterm elections and foreshadow GOP gains and the potential loss of Democratic majorities in the U.S. House of Representatives and Senate.
Daraius Irani, chief economist for the Regional Economic Studies Institute at Towson University in Maryland, said the inflation fight centers on curtailing record gas prices, rising real estate rents and prices that are creating an affordable housing crisis and an 11.9% jump grocery prices.
“Energy and housing and now food have been the real drivers of inflation,” Irani said.
Gas prices are at record high levels nationally ($5.02 per gallon). Rents are up 16.4% nationally. They are more than 30% in Florida markets such as Fort Myers, North Port/Sarasota/Bradenton and Miami. They are up more than 20% in Tampa, Orlando, Phoenix, New York and San Diego, according to analysis by Florida Atlantic University, Florida Gulf Coast University and University of Alabama.
'They created the problem'
Economists — especially on the fiscally conservative side — question whether the Fed and U.S. government have the wherewithal to address the inflation and supply chain crises.
The Biden administration (including Treasury Secretary Janet Yellen) along with Fed Chairman Jerome Powell previously discounted the inflation wave, calling it “transitory.”
“The vast majority of it is monetary,” said Dubay of the central bank infusions and government spending during the pandemic. Dubay said the $1.9 trillion American Rescue Plan Act COVID relief bill passed by Congress and Biden last year may have been the last inflationary propellant.
Griffith said Congress and the U.S. central bank pumped an additional $6 trillion into the economy during the coronavirus pandemic to help stave off a collapse. That is on top of existing spending levels — including bipartisan backing for U.S. defense budgets totaling $750 billion annually.
He said those outlays helped bolster corporate earnings that propelled Wall Street records during the start of the pandemic and those chickens are coming home to roost via inflation.
Griffith also said the pandemic relief money and central bank spending at some level served as window covering for the vast shutdowns, job losses and pay cuts during the pandemic. The U.S. economy lost 22 million jobs at the start of the pandemic. It is still down 822,000 jobs from the depths of the pandemic's economic pain, according to June jobs figures from the U.S. Bureau of Labor Statistics.
“They created the problem,” he said of monetary infusions and bipartisan support for elevated spending levels.
Economists and Wall Street analysts see contemporary parallels to the early 1980s when inflation and gasoline prices conspired for a major U.S. economic downturn.
“The last time inflation got out of hand, requiring strong policies to control it, was in the early 1980s, and one consequence was a major recession. That could happen again,” Holcombe said.