Here’s a prediction: Six months from now, we will be in a recession and unemployment will be rising. By the third quarter of 2023, Federal Reserve Chairman Jerome Powell will announce that 2 percent is no longer a viable inflation target, and that 3 percent or 4 percent is a more reasonable goal.
Why will he abandon his often-repeated 2 percent guidepost? Because President Biden will be running for a second term and will be franticly pitching the success of his economic agenda — a “success” that has left Americans pessimistic and poorer.
The pressure on Powell to tee up Biden’s reelection in 2024 will be immense. He has already shown himself vulnerable to political influence; the only possible explanation for not raising rates faster as inflation took root in 2021 is that he wanted to be reappointed to the prestigious Fed post and knew Biden wanted a dove in charge.
In 2023, as consumers finally respond to rising rates and shrinking real incomes, the economy will nosedive. Americans are plowing through the holiday season, determined to celebrate the waning of COVID-19. But they are running out of gas.
That showed up in the November report on retail sales, which dropped 0.6 percent from the prior month, the largest slide this year. We shouldn’t be surprised.
While spending in 2021 and earlier this year was fueled by a pile-up of excess savings and an unprecedented gusher of pandemic benefits, Americans are increasingly resorting to credit cards to buy their Christmas gifts. Credit card debt is up about 15 percent from this time last year, the biggest jump in over two decades.
At the same time, the savings piled up during the pandemic, when many Americans held onto their jobs or received checks from the government and had few opportunities to spend, has been plummeting. The estimated $2.3 trillion nest egg began to shrink late last year; at the end of the second quarter, it had dropped to $1.7 trillion. JP Morgan CEO Jamie Dimon predicts it will be gone altogether by the middle of next year.
Consumer stress is also evident in a sharply dropping personal savings rate, which tumbled to 2.3 percent in October, compared to a more normal 7 percent level. In the past 60 years, only once – in 2005 – did the rate drop that low.
Consumer spending has been propped up by a tight jobs market. That will likely change. Layoffs are widespread in the tech industry today, and Wall Street, too, is shedding employees; the numbers in other industries are gradually rising. Companies’ job postings have fallen sharply, and the number of available jobs, while still high, is declining.
At the same time, the Conference Board reports that consumer confidence is swooning, with near-term expectations, especially gloomy. “The combination of inflation and interest rate hikes,” says senior economist Lynn Franco in a press release, “will continue to pose challenges to confidence and economic growth into early 2023.”
Other recent reports confirm a slowing economy. The Fed’s latest read on manufacturing shows output dropping 0.6 percent in November compared to October, and increasing only 1.2 percent compared to last year.
None of this data impresses Biden’s economic team. Treasury Secretary Janet Yellen is unfazed, telling CBS’s audience recently that inflation will be substantially lower by the end of next year, and suggesting that the risk of recession is muted by a “healthy business and household sector.”
Yellen also told “60 Minutes” viewers that “I am very hopeful that the labor market will – remain quite healthy – so that people can feel good about their finances and their personal economic situation.”
Apparently, no one has told the secretary that a majority of the country has for months believed we are already in a recession, and Lending Club reports that in November, 63 percent of Americans were living paycheck to paycheck.
Moreover, US households have lost almost $7 trillion in net worth this year, as stock prices retreated.
Biden continues to boast that his economic plan is working. If the plan entailed splashing trillions of unnecessary dollars onto an already-hot economy, thereby driving consumption through the roof and simultaneously keeping millions of workers from returning to their jobs, driving wages and prices even higher — yes, it is working brilliantly.
Powell has the unpleasant task of mopping up the excess trillions spent by Democrats. Yellen may think a contraction is not “something that is necessary to bring inflation down,” but Powell appears to disagree. He has already encountered criticism from Democrats for his hawkishness, and that chorus will only become louder as the 2024 election looms.
Inflation is cooling, but, at 7.1 percent last month, we are far from a 2 percent target. With wages accelerating and China likely to reopen, inflation could prove sticky. Indeed, Powell made that case in his last press conference, suggesting that wage growth, which is running at about 5 percent, needs to drop to 3.5 percent to achieve 2 percent inflation.
The Dallas Fed reported in October that most workers’ wage hikes have lagged inflation. “For these workers, the median decline in real wages is a little more than 8.5 percent. Taken together, these outcomes appear to be the most severe faced by employed workers over the past 25 years.”
Will Powell work to increase squash wages even as Biden pitches his economic agenda?
Much easier for the Fed chair to move the goalposts – making 3 percent or 4 percent the new inflation target – than continue to clobber the economy with even more rate hikes. My guess: that’s exactly what he wants to do.
Liz Peek is a former partner of major bracket Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.