Is the economy improving? Before the midterms, no one has a good answer


As the United States prepares for midterm elections, conflicting headlines—Big Tech layoffs, volatile stock markets, a central bank willing to inflict pain to fight inflation—are obfuscating the answer to a simple question: Is the economy improving?

Maybe Maybe not If you’re frustrated by this, you’re not alone.

On the employment front, there is great news for anyone looking for a job. The US economy added 261,000 jobs in October, about 60,000 more than economists had expected. Unemployment remains at a historically low 3.7%, with nearly two job openings for every job seeker.

But that tight labor market is bad news for the Federal Reserve, which worries that workers’ demand for higher wages will make it harder to reduce prices, which have remained thematically high for more than a year. By aggressively raising interest rates, the Fed has sought to inject some slack into a tight labor market. Slack, which means less job growth, less wage growth, or even layoffs.

“The Fed is likely to be frustrated,” wrote Rucha Vankudre, a senior economist at Lightcast.

Vankudre says that when you put money in the machine, it’s like eating your change and holding onto your snack. “You put the money in, and the food moved a little but didn’t fall. And then you kicked it and put more money in, and it still didn’t fall. It’s like what the Fed is doing.’

Rather than getting what it wants – a slowdown in inflation – the Fed’s rate hikes are, for now, making things harder for Americans with cash. Inflation remains high, but it is now much more expensive to take out loans or pay off credit cards. And the Fed’s actions are wreaking havoc on foreign economies, strengthening the value of the US dollar, the basis of international trade.

US mortgage rates, which indirectly affect the federal funds rate, rose to 7% last week for the first time in 20 years. (The 30-year fixed rate average fell slightly this week to 6.95%, which is still more than double what it was a year ago).

Coupled with low inventory, the housing market has become a nightmare for both buyers and sellers.

Potential buyers are finding few homes they can afford. Sellers are disincentivized to list, in part, because even if they find a buyer, they would historically have high prices and low inventory when they go looking for a new place to live.

That’s been especially hard on young first-time buyers who don’t have the equity or savings to put a down payment on a home. As a result, they are renting for longer periods of time, which helps drive up rental prices.

A painful round of layoffs and hiring freezes is hitting workers at some of Silicon Valley’s top companies, a troubling sign that a recession could be on the horizon. Elon Musk started laying off Twitter employees on Thursday; Lyft announced it was cutting 13% of its workforce; and Microsoft and Amazon are freezing hiring.

Of course, tech companies are not indicative of the broader labor market, economists note. Many of these grew rapidly during the pandemic, and are now shrinking as advertisers say spending and demand cool.

“There’s no question that these are layoffs in Silicon Valley, but overall, the tech sector is still healthy and adding jobs,” wrote Bledi Taska, chief economist at Lightcast. “The story doesn’t always match the numbers.”

The economic pain we are experiencing now is based on the uniquely devastating impact of the pandemic. In 2020, the virus forced a violent shutdown that, two and a half years later, is still ripping through the global economy.

Demand for goods increased at the same time supply chains were contracting. This led to a series of shortages of everything from toilet paper to computer chips. Prices went up. Consumers stuck indoors used government stimulus checks to buy more stuff, fueling inflationary pressures. Then Russia invaded Ukraine, once again pushing supply chains to breaking point and exacerbating global food shortages.

The Fed, on the other hand, kept interest rates close to zero and invested heavily in bonds to prevent financial markets from imploding. Through 2021, Fed officials downplayed the rise in inflation as a “transient” effect that would eventually work itself out.

It wasn’t And now the Fed is playing an aggressive game of catch-up to prevent price increases from becoming entrenched in a vicious cycle.

Despite some tentative signs of cooling — the Consumer Price Index peaked at 9.1% in June and has since fallen to 8.2% (still well above the Fed’s 2% target) — prices are unlikely to fall overnight.

All of this points to a difficult puzzle for Democrats trying to hold on to power in next week’s terms.

Although the US economy is not technically in recession, nearly 75% of likely voters in a recent CNN poll said they feel it is.

Wages have risen, but not enough to offset the high prices of necessities such as food, fuel and shelter.

It hasn’t been a great year for those who have invested in stocks either, and that’s especially hard for retirees living off investments.

Economists will receive the inflation situation next week with the October CPI reading next week. But if there is good news in that report, it will be two days too late to sway voters one way or the other.