- Paul Constant is a writer at Civic Ventures and the cohost of the "Pitchfork Economics" podcast.
- He argues the economy is doing better than people think, with spending and employment up.
- He says economists need to prioritize the health and happiness of everyday Americans.
- This is an opinion column. The thoughts expressed are those of the author.
With headlines like "Rate hikes and recessions are still in the cards" and "Danger ahead: The U.S. economy has yet to face its biggest recession challenge," the media continues to stoke the public's fears of an economic downturn on the horizon.
The media is simply echoing what experts are saying: A June survey found that two-thirds of economists are predicting a recession by this time next year.
Every recession in the 20th and 21st century has followed predictable metrics — spending drops, unemployment rises, and manufacturing slows down. But because we're two-and-a-half years into a pandemic that grounded the global supply chain to a halt, many of the signals that economists rely on to take the economy's temperature are misleading or wildly erratic.
For example, retail spending was flat last month, but overall spending spiked by 10% in the same time. Unemployment numbers are currently very low, but many employers are entertaining the idea of layoffs. And several states have seen manufacturing numbers plunge, even as manufacturing numbers elsewhere surge ahead of expectations.
Those mixed signals give experts the ability to find whatever outcome they want to see. If you examine the economy with rising prices in mind, it looks like we're in a recession. But if you measure an economy by looking at the labor market, we're about as far away from a recession as we've been in decades.
What does it really mean to be in a recession?
Since the word is on everyone's lips, it's important that we hammer down the meaning of a recession. The technical definition involves the economy — typically measured by GDP — shrinking for at least two quarters in a row. In an economy as strange as ours right now, that leaves a lot of wiggle room for interpretation.
Most people should find the idea of a "recession" with high prices but a tight labor market paying wages that rise faster than inflation — in other words, one which leaves the majority of American families with stable sources of income — to be vastly preferable to a recession with lower prices and tens of millions of Americans out of work.
But the Federal Reserve seems to prefer the latter option. The Fed is likely to continue to raise interest rates for as long as they determine that a recession is likely, and raising interest rates too high will likely slow the economy down and cause unemployment to spike. And then the recession talk becomes a self-fulfilling prophecy: If Americans continue to believe that a recession is coming, they'll also likely curb their spending in order to save money for the layoffs they believe are inevitably just around the corner. Because consumer spending drives nearly 70% of America's economic output, that slowdown in consumer spending could cause the very layoffs that consumers fear.
The US economy is doing better than we think
Of course, one month's worth of data isn't enough to determine a trend. But the information underpinning positive employment and price reports is strong.
On the inflation front, the monthly Producer Price Index report, which tracks what it costs for American manufacturers to create products, fell for the first time in July since the pandemic began, and even the Core Inflation Rate, which removes plummeting gas and food prices from the inflation data and tracks changes in prices that consumers pay for a basket of goods, is at a six-month low. Meanwhile, on the employment front, real average hourly and weekly earnings increased by .5% in July after a year of solid declines, which means that many Americans are seeing their first real raises since the pandemic began.
The economy isn't anywhere near perfect. Homebuilder confidence continues to decline, even as housing prices and rents continue climbing upward. Wealth inequality continues to grow, with three men — Jeff Bezos, Bill Gates, and Warren Buffett — owning as much wealth as the bottom half of all Americans. And the 6-to-1 wealth-inequality gap between Black and white families is only predicted to worsen in the wake of the pandemic.
That said, we live in uncertain times, and nobody can predict whether or not a recession is imminent. Instead of trying to make sense of unreliable monthly metrics, the Federal Reserve, elected leaders, and economists should keep one economic indicator in mind as their North Star: the health and happiness of the ordinary American.
Are paychecks growing faster than prices? Are people easily able to find a job or switch to a better-paying job if they want one? Are Americans spending enough money to ensure that the service economy continues to add jobs?
By embracing policies which enhance the health and happiness of the majority of Americans, like paid family leave, restoring overtime protections for the middle class, and quality, affordable childcare, our leaders will reduce the misery created by a possible recession. And because consumer demand creates jobs, CEOs and business owners will continue to thrive, too. When your economic policies are centered around the growing paychecks of ordinary people, the economy improves for everyone.