Economic factors in flux

The pandemic recession ended three years ago, but, as we enter the summer season, the path forward remains uncertain.

The national April unemployment rate of 3.4% was the lowest in most people’s lifetimes, before jumping .3% in May to a still-low 3.7%. It is lower in Idaho, at 2.6%. Signs and billboards clamor for candidates and the minimum wage is irrelevant. The pandemic, policy and war-driven inflation were over 9% last June and now have fallen to 4.9% amid resurgent supply chains, tightening Fed policy and some commodity price weakening. However, it remains above the Fed’s target. The debt ceiling drama has been temporarily resolved,, averting, for the moment, peril for the world’s premier asset. There is much debate about the road ahead for the national economy, with aeronautical analogies very fashionable.

The economy was expected to slow in 2023. We are bumping up against capacity limitations in labor markets and some industries, monetary policy is tightening to deal with inflation and fiscal policy is moving to a post-pandemic mode.

The Fed raised its target funds rate to between 5 and 5.25% on May 4 for its 10th move since March of 2022. Interest-sensitive spending has been impacted, particularly housing and other durables. Resales have cratered as many owners have sub-3% mortgages and are not anxious to sell and move to a 6.5% rate. Affordability has declined. Recent Q1 2023 numbers from the Federal Housing Finance Agency show Idaho home prices declining for both the year and the quarter. Idaho residential building permits for the first four months were down 40%.

Labor markets remain strong with a net gain of 339,000 jobs in May. Earlier hints of softening were crushed with the latest job openings report, indicating an increase to 10.1 million openings in April, up from 9.7 million in March. All 50 states had year-over-year job growth in April; no recession in evidence.

The lagged effects of the interest rate increases, the fallout from Silicon Valley Bank, Signature and First Republic banks, which reflect asset liability management weakness, concentrated deposits, tech-fueled runs and regulatory failure will lead to additional scrutiny of lending and the holding of more liquid assets.

When rates increase, the value of assets like bonds goes down. This is finance 101, but, after a 40-year period of rates trending down, a shock for the young.

During the pandemic, people across the income spectrum accumulated assets: stimmies, enhanced unemployment benefits, other transfers and deferrals of payments which provided support at the time. These funds have diminished, but are not gone.

Moving through the rest of the year, the soft-landing scenario implies output growth, with some softening in the labor markets and a small rise in the unemployment rate. The hard-landing scenario encompasses a decline in output and a more significant rise in unemployment.

The jury is still out, and will be for a while. Advocates of each view can find nuggets of support, but there is not a preponderance supporting one view or the other.

The world we are now in is marked by slow labor force increases from demographics — aging boomers, COVID-19 deaths, low birth rates and immigration patterns, an attempt to restructure (decarbonize) the U.S. and global economies and new patterns of trade.

We, and some others, have a fiscal dilemma at the national level with an inexorably aging/medicating population, generational promises with Social Security/Medicare and rising international tensions with defense implications.

At the same time, there is a cry to reduce spending, but not touch the largest components or raise taxes. This is beyond the recent debt ceiling issue and will be with us for decades.

Meanwhile, we should maintain hope for a soft landing that brings inflation down.

Enjoy the summer!

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 regarding the nation and the region for nearly 50 years.