As the United States prepares for a crucial midterm election, a series of conflicting headlines — layoffs at Big Tech, volatile stock markets, a central bank determined to bring pain to fight inflation — blur the picture. answer to a simple question: is the economy improving?
Maybe. Maybe not. If you’re frustrated with this, you’re not alone.
On the employment front, there is great news for anyone looking for work. The US economy added 261,000 jobs in October, about 60,000 more than economists expected. Unemployment remains at a historic low of 3.7% and there are almost two jobs open for every person looking.
But that tight labor market is bad news for the Federal Reserve, which fears that the easier it is for workers to press for higher wages, the harder it will be to bring down prices that have remained stubbornly reared for more than a year. By aggressively raising interest rates, the Fed sought to introduce some easing into a tight labor market. Slack, which means less job growth, less wage growth, or even layoffs.
“The Fed is likely frustrated,” wrote Rucha Vankudre, senior economist for Lightcast.
It’s like when you put money in a vending machine so it eats your change and withholds your snack, says Vankudre. “You put some money in it and the food moved a bit but it didn’t fall. And then you threw it and put more money in it, and it still didn’t fall. It’s a bit like what the Fed is doing.
Rather than getting what it wants – a slowdown in inflation – the Fed’s rate hikes are, for now, only making things harder for cash-strapped Americans. 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 overseas economies by bolstering the value of the US dollar, the cornerstone of international trade.
US mortgage rates, which are indirectly influenced by the federal funds rate, climbed to 7% last week for the first time in 20 years. (The average 30-year fixed rate fell slightly this week, to 6.95%. That’s still more than double what it was a year ago.)
Combined with low inventory, this has turned the housing market into a nightmare for both buyers and sellers.
Potential buyers find few homes they can afford. Sellers are not motivated to list, in part because even if they find a buyer, they would face historically high prices and low inventory when looking for a new home.
It’s been especially difficult for young first-time home buyers who don’t have the equity or savings to shell out for a home. The result is that they rent longer, which helps drive up rental prices.
A painful series of layoffs and hiring freezes are hitting workers at some of Silicon Valley’s top companies, a worrying sign that a recession could be on the horizon. Elon Musk began firing employees on Twitter on Thursday; Lyft announced it was cutting 13% of its staff; and Microsoft and Amazon are freezing corporate hiring.
Of course, tech companies aren’t representative of the broader labor market, economists warn. Many of them have grown rapidly in the pandemic era and are now shrinking as advertisers rethink spending and demand cools.
“There is no doubt that there are high profile layoffs in Silicon Valley, but overall the tech sector is still healthy and creating jobs,” wrote Bledi Taska, Chief Economist for Lightcast. “The story doesn’t always match the numbers.”
The economic pain we are currently living with is rooted in the uniquely devastating impact of the pandemic. In 2020, the virus forced a screeching halt which, even two and a half years later, continues to reverberate through the global economy.
Demand for goods grew as supply chains became distorted. It caused a cascade of shortages of everything from toilet paper to computer chips. The prices were raised. Consumers stuck inside their homes used their government stimulus checks to buy more stuff, fueling inflationary pressures. Then Russia invaded Ukraine, once again bringing supply chains to breaking point and exacerbating global food shortages.
The Fed, meanwhile, kept interest rates near zero and invested heavily in bonds to prevent financial markets from imploding. Throughout 2021, Fed officials downplayed rising inflation as a “transient” effect that would eventually unwind.
This was not the case. And now the Fed is playing an aggressive game of catch-up to prevent price spikes from becoming entrenched in a vicious circle.
Despite some tentative signs of a slowdown — the consumer price index hit 9.1% in June and has since fallen to 8.2% (still well above the Fed’s 2% target) — prices are unlikely to drop overnight.
This all points to a difficult puzzle for Democrats trying to hold onto power midterm next week.
Even though the U.S. economy is not, technically, in a recession, nearly 75% of likely voters in a recent CNN poll said they felt it was.
Wages are rising, but not enough to mitigate the high prices of basic necessities like food, fuel and housing.
For those who invest in equities, the year has not been great either, and it is particularly difficult for retirees who live off their investments.
Economists will get a fresh look at the state of inflation next week with October’s CPI reading on Thursday. But if there is any good news in this report, it will be two days too late to influence voters one way or another.
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