Confusing end of summer

Surging employment, generational high inflation, a rebounding stock market (or a dead cat bounce), depressed consumers and resilient retail sales make for a late summer cacophony.

Most believe that we are in a recession, but as of this writing no states are experiencing annual declines in employment and the negative quarters of GDP growth, largely reflect inventory and international trade flows.

We must remember that all these numbers are subject to revision, and entering the political season, claims and counterclaims with minimal evidence will be strident.

Headline inflation declined in July, as energy prices moderated, with the year-over-year CPI falling to a still uncomfortable 8.5%. The Federal Reserve remains on a path of increasing rates and shrinking its balance sheet as do other central banks.

This process is not over, and no one knows how long it will last, or how high rates will go to curtail inflationary pressure. Some of the pandemic-related price pressures show signs of abating — shipping rates, chip shortages and supply chain issues. The war in Europe, weather and COVID remain wild cards that could still deliver price level shocks.

The July employment report with a return to the pre-pandemic 3.5% unemployment rate and a net increase in payroll employment of 528,000 was a reminder of the data’s ability to surprise and distort narratives. The decline in the labor force participation rate (the fraction of the adult population working or looking for work) to 62.1%, below the 63.4% at the start of the pandemic, remains troubling for our prospects going forward.

The closed school, daycare and extra unemployment compensation rationales are gone. The tight labor market and rising wages mean that the cost of remaining on the sidelines is rising. Higher inflation and a decline in portfolios may bring some retirees back into the labor force. Immigration is another key to boosting the labor force. Time will tell.

For people under the age of 60, the process of bringing down high inflation is a new experience while for others high inflation, gas and food shocks conjure up distant memories of the 1970s and 1980s.

The path will test the Federal Reserve. Will it follow through a la Paul Volcker or waffle a la Arthur Burns?

Rising rates, as well as soaring prices, have already cooled the housing market, but more stringent underwriting means that this will not be a replay of the 2007-2009 crash.

Will it be the proverbial soft landing-slower growth and no recession or something more serious? The slower growth after the pandemic and stimulus fueled snapback of late 2020 and 2021 was inevitable but the path forward is uncertain.

Idaho, like all other states, continues to see annual employment growth. The payroll job count was up 3.1% in the year to June and the unemployment rate was 2.5%. In Coeur d Alene it was 2.6% job growth and a 2.9% unemployment rate.

As in many other states, revenues came in above forecast levels resulting in a $1.4 billion state budget surplus.

The pandemic disrupted the business world and opened options. Idaho thrived, being the first state to surpass pre-recession levels of employment.

We are now moving into a slower period with major institutional changes in the last few weeks including the CHIPS Act and the artfully named Inflation Reduction Act with its climate emphasis. How people and institutions respond to the incentives in the years ahead will be fascinating to watch.

• • •

Press contributor John W. Mitchell was a professor of economics at Boise State University for 13 years before joining U.S. Bancorp in 1983. He was Chief Economist of U.S. Bancorp until July 1998 and served as Economist Western Region for US Bank until July 2007. A resident of Coeur d'Alene, Mitchell has been making economic presentations on the nation and the region for almost 50 years.