January is typically a slow month, economically-speaking.
After the December holidays, consumers tend to retrench, limiting their spending and paying down credit card balances. Car sales slow, as does home-buying. With winter in full swing and mid-term breaks not arriving until March, few families with school age children take vacations in January, squeezing the tourism sector.
It was with some surprise, then, that economists and sundry prognosticators greeted the first U.S. jobs report of 2023 on February 3. The U.S. Bureau of Labor Statistics stunned economy-watchers with news that the economy added 517,000 jobs in January, cutting the unemployment rate to 3.4%, its lowest level since May 1969.
January’s well-earned reputation as an economic laggard made the jobs report all the more striking, as economists were braced for mediocre employment growth in the 220,000 range. This would have been taken as evidence that the Federal Reserve’s biggest series of rate increases since 2007 were priming the economy for a mid-2023 recession.
THE PROFESSIONAL ORACLES FAIL AGAIN
Even the deaf could hear veritable sighs of relief up and down Wall Street and on Capitol Hill when the jobs data were released. But those with a keen sense of hearing discerned many of the same Gloomy Gus’s who warned of the dire risks of a pending 2023 downturn – as recently as December 2022 – glibly walking back their remarks of two months prior.
A fairly typical discourse in this vein came from John Silvia, founder of Dynamic Macroeconomic Strategy, in a February 4 interview with Bloomberg television.
“The economy is now in a sweet spot. The latest jobs number is a victory (for policymakers). It does not eliminate the risk of a 2023 recession given that the Fed is likely to increase rates further, but the picture is looking a lot brighter,” Mr. Silvia said.
Only six weeks earlier on the same news program, Mr. Silvia had fretted about U.S. corporate profits, falling labor productivity, declining building permits and work force participation, and had pointed to ‘leading indicators’ released by The Conference Board showing eight back-to-back months of declines, which had ‘accurately signaled each U.S. recession since WW II.’
Wow! I suppose that makes The Conference Board, collectively, the greatest Western sage since the Oracle of Delphi.
…or not.
A CHORUS OF SIGHING GROUNDHOGS
Greymantle would suggest instead that Conference Board economists and prognosticators like Mr. Silvia carry about the same degree of predictive power as Punxsutawney Phil and his sundry groundhog colleagues in the business of predicting winter weather.
Any resident of New Jersey or Pennsylvania (along with anyone who has seen the Bill Murray movie ‘Groundhog Day‘) has heard of the famed groundhog Punxsutawney Phil, ‘Sage of Sages, Seer of Seers, Prognosticator of Prognosticators’.
On February 2 of each year, on Groundhog Day (without doubt the most eccentric holiday celebrated by human societies anywhere on planet Earth), Punxsutawney Phil and his colleagues emerge from their burrows to sniff the cold winter air and look for their shadows. If their shadows are visible, then the furry rodents are said to predict six more weeks of winter.
On February 2, 2023, Punxsutawney Phil was believed by his handlers to have recognized his shadow on the ground before him, cast in the glare of a bright winter sun.
This is…not the most scientific means of predicting the weather.
Personally, I expect that Punxsutawney Phil’s prediction was a bit off the mark, if the first six weeks of winter gave any indication of the six weeks remaining.
The winter of 2022-23 has so far gone down in the history of the northeast United States as one of the warmest on record, with the lowest snow count as measured by inches of snowfall since record-keeping began in the early 18th century. Perhaps the waning days of February will surprise us, but I kinda think the 50-something degree days are set to persist.
And as with groundhogs, so with economic forecasters.
But wait, you may ask. Economists are a heck of a lot better informed than groundhogs. They have better data at their disposal. They have PhD’s. Most of them have a prefrontal cortex, for Pete’s Sake! Isn’t your mocking comparison of economists to groundhogs just a bit unfair?
Greymantle responds in the negative. It is perfectly defensible to compare the failed predictions of professional economists to the predictions – failed or otherwise – of un-credentialed rodents. Why? Because the track records of the economists are about as good as those of the groundhogs.
How many economists predicted that the U.S. economy was set for continued growth in late 2007? That a major recession wasn’t anywhere in the offing for 2008? The answer: quite a few.
The sad truth is that economists are as apt to drink the flavored Kool-Aid of the month as do other dedicated followers of fashion. Groundhogs may be no more accurate in their predictions for the weather than economists in their predictions for the economy, but at least groundhogs make no claim to be ‘scientific’ or ‘data driven’.
As for the economists, they are essentially a chorus of sighing groundhogs. You can take what they with a big grain of salt.
THERE WILL BE NO 2023 RECESSION
Take it from Greymantle, the U.S. economy is going to avoid a recession in 2023 and perform just fine, creating 250,00 to 400,000 jobs a month in the first half and slightly north of 150,000 per month in the second half.
The U.S. will avoid two consecutive quarters of negative growth in calendar year 2023 and most likely even a single quarter of negative growth.
But, why is that the case when short-term interest rates are going up and the housing market is entering a correction?
Here’s the answer: recollect your Economics 101 course from high school or your first year of college: it’s all about supply and demand.
The supply of housing in the U.S. is about as low as it has been since the late 1940s versus demand. Homebuilders essentially stopped building new houses between mid-2008 and 2013, and supply has grown at a snail’s pace in the ten years since.
Even if mortgages become less affordable, the fact remains that young families need homes and there aren’t a lot of them on the market. Mortgage rates be damned. The small number of available homes is going to sell.
Here’s another revelation for you: the federal funds associated with the Infrastructure Investment and Jobs Act (IIJA) of 2021 have barely even begun to be spent yet. We are talking about $1.2 trillion here. Less than $100 billion of those moneys have been spent to date, much less allocated.
The same goes for the bulk of the $1.9 trillion in American Rescue Plan Act (ARPA) moneys. While U.S. state legislatures appropriated most of the first tranche of ARPA moneys in their fiscal 2022 and 2023 budgets, not all of those moneys were actually spent, and portions of those dollars are going to roll over into fiscal 2024. And that leaves much of the second tranche unallocated, and unspent, at the present time.
So, while it’s true that the federal CARES and CRRSAA (‘Cressa) Act moneys have already worked their way through much of the US economy, the funds associated with ARPA and IIJA are only in the early stages of circulation between workers, employers, bankers and retail goods providers. A hot economy is only going to get hotter in 2023 and 2024.
WHAT ECONOMISTS DON’T UNDERSTAND
President Biden and his top aides understand this fact. Republicans and professional economists do not. The Republicans, Greymantle can forgive by virtue of their being simple folk and idiots generally. The economists Greymantle cannot forgive, because they should know better. They are allegedly informed and credentialed people with access to (let’s use the word ‘allegedly’ again here) the ‘best’ information.
So, what’s getting in their way? What are economists stumbling over that is preventing them from making the correct predictions?
The answer: their desire to appear professional and non-partisan. Their need to appear objective and neutral. That is their chief stumbling block. That, and the fact that too many professional economists spent the past 40 years trying to purge John Meynard Keynes from their collective memories in favor of Milton Friedman.
Here’s a hint, people: None of the $4.8 trillion of U.S. stimulus moneys from 2020 and 2021 has disappeared from the economy – and that number greatly discounts the actual amount of federal stimulus pumped into the economy during the pandemic by way of Fed rate cuts, Fed bond purchases, and the 6.2% increase to the federal Medicaid dollar match.
Those dollars are now sitting in bank accounts both personal and corporate, as well as on the balance sheets and in rainy day funds of U.S. state governments. A lot of dry powder there!
In other words, those dollars are just waiting to be spent again. And again. And again. And if they are not spent, they are going to be earning a shit ton of interest as the Fed keeps raising the Fed Funds Rate in 2023.
What does that earned interest consist of, in fact? The answer: more money. More marvelous money conjured up by Jerome ‘Albus’ Powell and the other wizards working for Hogwarts School of Witchcraft and Wizardry, er, that is to say: the Federal Reserve Bank of the United States.
All that miraculously conjured money is going to keep the U.S. economy going, and going, and going for…well, I don’t know exactly how long, but quite a while, certainly. That money is going to fund teacher raises and road repair and new sewer lines and Taylor Swift concert tickets for millions of young American girls. The upshot: you guessed it – low unemployment, job creation and continuous GDP expansion.
WHAT ABOUT THE ‘SUPER BUBBLE’?
But, wait. What about inflation? What about the ‘super bubble’ in, like, everything? U.S. government debt included.
Shouldn’t we all be terrified of the ‘super bubble in everything’?
Greymantle counsels ‘no’.
The only thing that should concern us in relation to the ‘super bubble’ is the pace and destination of central bank rate increases.
If the Fed and other central banks revert to hiking rates at the pace the Fed was following in 2022, consisting of several back-to-back 75 basis point increases, then that would indeed be a problem. As would a continuous series of rate hikes that take us above 6.5% for Fed funds. Anything above that level would likely start bursting credit bubbles left and right.
But if the Fed, the Bank of England, the ECB and the Japanese central bank keep their rate increases to 25 bps per hike, and call a halt to those hikes by late 2023, then the credit markets will reach a sustainable ‘new normal’ that avoids a severe equity markets correction, a run on the bond market and the banks, and a housing market collapse.
In fact, if the central bankers can pull that off, then they will have deflated the ‘everything bubble’ significantly while re-pricing the bond market and bringing inflation back to historical ranges. Congrats will be in order!
Central bankers will have deflated the ‘super bubble’ without bursting it, quite a remarkable achievement. And they will have put the developed market economies, the U.S. in particular, on a path back to real balance after 15 years of ‘financial suppression’ that began in 2008, characterized by year after year of artificially low interest rates, deflation, and massive bond buying by central banks to support the debt markets.
WHAT COMES NEXT?
So, what comes next? Mostly, a battle over scarce labor supply that will result in an unnaturally slow rate of growth in the supply of new homes and the rebuilding of essential infrastructure. Several years of low immigration and low birth rates, coupled with all those federal dollars, will lead to a chronic delays in the schedules of most major infrastructure projects, which will stretch out the present U.S. expansion until 2029.
The Eurozone will also record strong growth in 2023 and 2024, and likely for several years beyond.
The reasons for this are simple: after the fuel price panic set off by Russia’s invasion of Ukraine in February 2022, spot oil and natural gas prices have returned to earth. The EU is now sitting on a huge surplus of fuel supplies thanks to a warm winter. Greymantle believes a burst of consumer and capital spending will commence in March 2023 in the Eurozone.
After two years of pandemic-related lockdowns and a year of fuel panic, those trendy Europeans are in a mood to go out and spend money. Wary of expanding their business footprint in Russian and China, European corporate are going to start investing closer to home. Expect EU business investment in the EU borders to pick up in 2Q 2023.
Finally, let’s not forget that the EU has some 5 million new residents in the form of highly skilled and motivated Ukrainian refugees and Russian expatriates who are not going to be content to sit around on the dole. Many of the 200,000 or so Russian expats who fled in 2022 worked in Russia’s high tech, business services, or creative sectors. These are highly skilled people and will be snapped up by EU employers.
A tight labor market across the developed world means that anyone who wants to find work and is able to learn new skills is going to get hired and will do their bit to grow developed economies. They are going to live hard and play hard.
FINAL THOUGHT: REALITY OVER FICTION
So, Greymantle will wrap up this post with the following declaration: the Great U.S. and European Recession of 2023 will soon be proved to have been a collective work of fiction written by professional economists and technocrats. Nothing more.
Not that the economies of the developed world will have all smooth sailing in the remaining ten plus months of the year. Inflation remains high, clear labor force challenges persist, and the bond market has taken a beating on the road to its new condition. The fight in the U.S. government over the Debt Limit is also no joke, and could yet unleash chaos in the financial markets and beyond into the real economy.
But consumers, banks, businesses and state and local governments in the U.S. and EU are in a much better position than they were in back in 2011 and 2012 in the aftermath of the actual Great Recession. Schools and hospitals and public works departments are hiring. Folks have money in their pockets to spend. We are not looking at another five years of austerity.
Whether Punxsutawney Phil saw his shadow two weeks ago or not, it is clear that the economic sun is shining once more. Both in the climatological sense and the economic sense, winter is nearly over.
Even a groundhog would agree!
Happy belated Groundhog Day.
Until next time, I remain —
Greymantle
