12.13.2022 0

Inflation keeps cooling as global economic slowdown takes hold, but how bad will the recession be?

By Robert Romano

Consumer inflation in the U.S. fell to 7.1 percent for the past 12 months in November, down from 7.7 percent in October and 8.2 percent in September, according to the latest data from the Bureau of Labor Statistics (BLS), as the global economy continues cooling.

That makes the fifth straight month that prices have kept on falling after inflation peaked at 9.1 percent in June 2022.

The biggest driver for the softening prices has been the price of oil coming down after peaking in March 2022 at $123 a barrel and now is down to about $75 a barrel.

Gasoline was down 2 percent in November, following a 7.6 percent drop in July, a 10.6 percent drop in August and 4.9 percent drop in September.

In October, though, gasoline was up 4 percent when oil again surged briefly to $95 a barrel after OPEC+ announced it was slashing oil production by 2 million barrels a day. Afterward, though, prices kept falling amid weakening demand.

All of which is yet another recession signal. The economy overheats as peak employment is reached, and as consumers spend more money on food and energy, they spend less on other goods and put off larger purchases until finally, the contraction occurs. The falling prices are a symptom of that.

Elsewhere, there are many other recession signals.

The spread between 10-year treasuries and 2-year treasuries has been inverted for several months now since July as investors dump short term bonds in favor of longer term bonds. That has happened before every recession in modern history.

In labor markets, job openings are down 1.5 million to 10.3 million from their March 2022 peak of 11.8 million.

In the past two months, 466,000 fewer Americans reported having jobs in the BLS household survey. There were also dips of 353,000 in April and 315,000 in June that were offset by gains in May and July.

That’s what peak employment looks like. It clanks around the top as businesses seek to expand and then, when they fail, they capitulate. First job openings fall, as they have, and then the job losses begin. Firms top hiring, and then they start firing.

So, it all looks like a garden variety recession unfolding before our eyes — a lot like watching a slow motion train wreck — just in time for the 2024 election cycle, as incumbent President Joe Biden’s fate might very well be determined by just how bad the current recession turns out to be.

If it’s pretty bad, just ask Herbert Hoover, Jimmy Carter, George H.W. Bush and Donald Trump, who all suffered recessions during their terms of office, and were only one-term presidents. They all lost.

Or it could be less bad than expected, or be over long before any voting in 2024 begins.

Ronald Reagan had a pretty bad recession in 1982 but by the time 1984 rolled around, the recovery had long since been underway and he was easily reelected.

Gerald Ford was another one-termer who had a recession in 1974 that had recovered by 1976, and he lost narrowly to Jimmy Carter.

The danger now, though, could be a shallow recession now, followed by inflationary forces again rearing their head. In the 1970s and 1980s, this happened a several times.

Inflation peaked at 6.4 percent in Feb. 1970, and then retreated to 2.9 percent by 1972 after the recession, and then peaked again in Nov. 1974 at 12.2 percent, before going down 5 percent by Nov. 1976 after the recession, and peaked at 14.6 percent in March 1980 before going down to 9.7 percent in June 1981 and spiking again into the 1982 recession to 10.7 percent.

Each time, the recession came and prices would fall, only to rise again afterward. The choice could be to take our medicine now as the Federal Reserve meets to again hike interest rates, or to pay for it later. Stay tuned.

Robert Romano is the Vice President of Public Policy at Americans for Limited Government Foundation.   

Copyright © 2008-2024 Americans for Limited Government