March/mid-April Economic Outlook

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February/March Economic Outlook

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January 2023 Economic Outlook

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September/ Mid October 2022

Introduction

Recent polls from Fox News, The New York Times, and others indicate the November mid-term elections will turn on two major issues: inflation and the economy, and crime rates.  These polls seem to show Republicans with a better than even chance of taking both the House and Senate as the majority of Americans blame Biden Administration policies and de facto Democrats for both. It’s difficult to hide from the facts: the U.S. Consumer Price Index (CPI) was 1.4% when the President took office, at 7.4% in January 2022 – a month before Russia invaded Ukraine and is 8.2% today. Particularly vexing is the current CPI core 6.6% inflation rate is at a multi-decade high.

Key  September / Mid-October Data

Positive and Negative Signs

Recently, the Internal Revenue Service (IRS) announced that personal income thresholds for U.S. tax brackets will increase by 7% in 2023 to adjust for inflation. Adjusting tax brackets to inflation was one of the many positive U.S. tax policy changes under the Reagan Administration. Social Security recipients benefit also as the Cost-Of-Living Allowance (COLA) will be 8.7% in 2023. However, the average American household, which earns about $70,900 a year, paid roughly $5,800 more to purchase the same items in September of 2022 vs. September 2021, due to high inflation levels.

Current Issues

The following two examples are among many inflation-driven problems the U.S. economy faces today due to improper monetary and fiscal policy, and the belief 18 months ago that inflation was transitory.

Strategic petroleum reserve where we are and in the future?

President Biden’s decision to use the U.S. strategic petroleum reserve to fight gasoline inflation was wrong.  Well-intended but politically motivated, our President’s misguided decision reduced prices for a brief period and has made the U.S. vulnerable to numerous “problematic scenarios,” while ignoring the root cause of higher gasoline prices: inflation. In January of 2021, the U.S. strategic oil reserve held 638 million barrels of oil stockpiled for use in emergencies, like natural disasters, and military conflicts. It was not designed to artificially reduce oil and gasoline prices to politically influence an election. After months of selling, the U.S. strategic oil reserve is now at 434 million barrels, or 204 million barrels below its January 2021 high, increasing our vulnerability to natural disasters, geopolitical problems, and military conflict. It will cost almost $19 billion to replenish the U.S. strategic oil reserve at today’s prices. While gasoline prices have declined considerably since June, the Biden Administration has stated its intention to tap our strategic oil reserves once again despite being at a 38-year low. However, it’s been market forces driving oil prices higher for the last three months. Most of the root cause is an inflation rate that the U.S. Federal Reserve and federal government have failed to tame. Consider in late January 2021 gasoline prices were $2.38 a gallon, and by June 2022 reached a record high of $5.01 a gallon. Three weeks ago, the national price of gasoline had fallen to $3.67 a gallon, yet by October 11th it was at $3.92, due to supply and demand factors, and the OPEC+ decision last week to cut daily oil production by 2 million barrels on the growing belief that a global recession will occur in 2023.

 The U.S. National Debt is growing in size and scope

Our nation is at a crossroads. The rapidly growing total national debt of the United States is over $31 trillion and represents almost $93,000 for every American man, woman, and child, almost $246,000 for every U.S. taxpayer and 125.5% of current U.S. Gross Domestic Product (GDP). The U.S. government added more than $1.136 trillion to our national debt over the last fiscal year ending in September. Compounding the national debt problem and equally troubling is U.S., state and local debt which adds another $2.55 trillion to the U.S. government debt burden. The current gross interest payment on the total U.S. federal deficit is over $533 billion annually and is expected to surpass $1 trillion in this fiscal year due to rapidly increasing short-term interest rates which rise directly with inflation. Higher interest rates will move national debt interest from the 5th largest annual cost in the U.S. federal budget currently, to as high as number two. This mess is due to naïve politicians’ belief that high rates of government debt and excessive government spending were compatible with keeping annual inflation between 2 and 3%. Metaphorically, our “economic chickens” have come home to roost with a massive federal deficit financed by high interest rates which are fueled by 40-year high inflation rates. It is sad and a dereliction of duty that our politicians and leaders of the Federal Reserve believed these irresponsible policies would not bring any negative economic consequences.

Conclusion

We at the McNair Center are very worried about the state of the U.S. economy. We believe the recent and dire predictions of CEOs and business executives in KPMG and Bloomberg surveys of a recession in 2023 to be more accurate than not. To lower inflation, we must cut government spending and reduce our inflationary money supply. Continued mismanagement and a lack of fiscal and monetary discipline has created the quandary our nation finds itself in today. If we do not, it is doubtful the United States can remain the world’s beacon of freedom, entrepreneurial powerhouse and the world’s financial leader with the dollar as the world’s strategic reserve currency. In a recent CNBC interview with J.P. Morgan Chase Chairman and CEO, Jamie Dimon called for American leadership to be at its best and lead the free economies of the world out of the turbulent times we are facing today. “This is the chance to get our act together and to solidify the western, free, democratic, capitalist, free people, free movements, freedom of speech, free religion for the next century.”

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at: tgnash@northwood.edu.  The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University.  This month’s publication was co-authored by McNair student scholar, Brad Getchel. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, visit:  http://www.northwood.edu/media/publications/. For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.

August/Mid September 2022

Introduction

On September 8th Elizabeth Alexandra Mary Windsor, commonly known as Elizabeth II, by the Grace of God, Queen of the United Kingdom of Great Britain and Northern Ireland, head of the British Commonwealth and defender of the faith, passed away at the age of 96.   Queen Elizabeth II, as of June 2022 served as Queen of England for 70 years, a reign that encompassed some or all of eight different decades since the early 1950’s.  Her reign spanned 15 prime ministers of the United Kingdom, 14 U.S. presidents, and 7 pontiffs of the Roman Catholic Church.  Even though we are not champions of a constitutional monarchy, Queen Elizabeth II was a great leader of one of America’s closest allies through good times and bad, for longer than most Americans have been alive.   The world is clearly a better place for Queen Elizabeth II having lived as a champion of a freer, more ethical world.

Key August / Mid - September Data

Positive and Negative Signs

As of early September, the Dow Jones Industrial Average (DJIA) is down 12.56% for the year at 31,774.52.  The DJIA has lost 4,563.78 points since December 31, 2021.  The NASDAQ is down 21.8%, year to date, with the S&P 500 down 15.95% over the same period.  The stock markets have experienced great volatility since late July as the Federal Reserve continues to tighten the U.S. money supply to combat inflation, which measured 8.5% based on the Consumer Price Index (CPI) for July.  As we continue to track U.S. inflation, a strong predictive gauge we use of current and future daily U.S. inflation is the Inflation Nowcasting produced by the Cleveland Federal Reserve Bank which provides a daily forecast or estimate of U.S. inflation which we find to be a useful compliment or supplement to inflationary trends.  The CPI measures inflation on a monthly basis (August 2022 CPI due out September 14).  Current Inflation Nowcasting estimates predict U.S. inflation rates of 8.24% for August and 8.22% for September.  The U.S. economy continues to send mixed signals as Q1 and Q2 U.S. GDP, a declining U.S. stock market and falling lumber and gold prices throughout 2022 indicates a U.S. economy in decline and even in recession, while high levels of inflation and U.S. job growth have others believing we are experiencing economic growth or perhaps stagflation.  As we have been saying for months, the U.S. economy is among the most confusing and challenging to analyze in more than 40 years. 

Current Issues

The following three variables remain worrisome regarding the current and future state of the U.S. economy and should in our opinion weigh heavily on voter decision-making in the fall elections.

1.)   U.S. National Debt – as of early September, the overall U.S. federal national debt is $30.88 trillion and growing, or is $92,688 per man, woman, and child and just over $245,000 per U.S. taxpayer.  The current U.S. national debt is now 124.41% of current U.S. GDP, up from 34.66% in 1980. What is perhaps most difficult to comprehend is that our current U.S. federal budget year which ends in a few weeks on September 30, 2022 has a built-in federal budget deficit of just under $1.45 trillion, something most Americans do not realize and will, based on our calculations, come in at a deficit of at least $1.51 trillion.  In addition to almost $31 trillion in federal debt, total U.S. state and local debt adds $3.3 trillion in debt obligations for U.S. taxpayers to handle.

2.)   U.S. Economic Growth – the U.S. economy grew at -1.6% in Q1 2022 and -.6% in Q2 2022.  The most recent Q3 2022 forecast by the Atlanta Federal Reserve Bank’s GDPNow indicator calls for economic growth of 1.3%, down from its prediction of 2.6% Q3 GDP growth a month ago.  We firmly believe increased government spending, regulation of the U.S. energy sector and the threat to overturn much of the Trump-era tax cuts will insure a continued slowing of the U.S. economy and a prolonged recession well into 2023.  It is our firm belief that taxing and regulating the U.S. economy, especially during challenging economic times will produce less economic growth, not more.

3.)   U.S. Inflation – even though it appears inflation is declining in the United States, it has little to do with current U.S. fiscal or monetary policy.  Our current success bringing down U.S. oil and gasoline prices is due in part to our dangerous reduction in the U.S. petroleum reserve, which is now at its lowest level since 1984 and declining consumer confidence and demand.  In reality inflation continues to be a major problem in the U.S. economy when measured by food prices, housing, rent prices and interest rates.  As an example, the 30-year fixed mortgage interest rate recently climbed to 5.84% which certainly will continue to slow real estate sales in the months ahead.  If we are to defeat inflation, it is imperative fiscal sanity is brought to government spending and the Federal Reserve holds to a tight monetary policy as current wage growth is roughly 5.2%, fully 3.3% behind our current inflation rate of 8.5%. 

Conclusion

With roughly two months left before the fall elections, the U.S. economy will be a major reason why and how millions of Americans vote in November.  From Pew to Quinnipiac pollsters are predicting record turnout with major concern over the economy and inflation being the key single largest driver of Democrats, Republicans, and Independents.  We believe the Federal Reserve Bank will continue to fight inflation in the months ahead by tightening its monetary policy through higher interest rates and the reduction of its balance sheet.  However, we continue to be concerned over excessive government spending coming out of our nation’s capital.   Recent government programs sold to fight inflation, stimulate “green energy” and forgive student loans if signed into law, will result in more than $5 trillion in new government spending championed by President Biden’s administration to date.   This excessive growth in government spending in our opinion, will grow the U.S. national debt and increase not decrease U.S. inflation in the months and years ahead.

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at: tgnash@northwood.edu.  The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University.  This month’s publication was co-authored by McNair student scholar, Brad Getchel. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, please visit:  http://www.northwood.edu/media/publications/ .  For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.

Northwood University is committed to a policy of nondiscrimination and equal opportunity for all persons regardless of race, gender, color, religion, creed, national origin or ancestry, age, marital status, disability or veteran status.  The University also is committed to compliance with all applicable laws regarding nondiscrimination. Northwood University is accredited by the Higher Learning Commission and is a member of the North Central Association (800-621-7440; higherlearningcommission.org).

June / Mid July 2022 Economic Outlook

Introduction

China has real estate problems at home with many experts arguing the problem could be in the trillions of dollars. Reuters recently reported China plans to develop a real estate rescue fund worth up to $44 billion for its distressed real estate sector Some believe it is too little too late as Chinese regulators scramble to reassure investors over what appears to be a looming Chinese real estate bubble. While many in China are concerned about real estate prices in the mainland, China has quietly acquired more than 192,000 acres of U.S. farmland, worth roughly $1.9 billion. This is a drop in the bucket compared to the 900 million acres of land we have in the United States. However, it is quality of land and the strategic importance of said land that have many in the United States concerned. A Chinese company recently purchased 300 acres for farming purposes in Grand Forks, North Dakota, which just so happens to be within a few miles of Grand Forks Air Force Base. In 2021, Chinese citizens bought $6.1 billion worth of U.S. real estate which was up 27% from 2020, much of it being residential real estate in the Silicon Valley or South Florida. Perhaps of equal or greater concern, Chinese individuals and government collectively own roughly $1 trillion or 2.78% of our $30.6 trillion total U.S. national debt.

Key June / Mid July Data

Positive and Negative Signs

With growing differences between the United States and China, war in the Ukraine, the crisis on our southern border and the shrinking U.S. economy, it is no wonder that President Biden is facing the worst approval ratings for a U.S. President. A recently released Quinnipiac University poll shows President Biden’s job approval rating at only 31% approving, while 60% disapprove.  When asked to evaluate President Biden’s handling of the U.S. economy, the respondents to the Quinnipiac poll gave the president a 28% approval rating while 66%

disapproved of the job the president is doing, a year and a half into his presidency.

Current Issues

In a little over three months, the U.S. will have mid-term elections which could result in a major shake-up of many state and local governments as well as the potential for Republicans to win leadership of the U.S. House and Senate. The following three factors will play a major role in determining the makeup of the U.S. House and Senate in November as the No. 1 issue American voters seem to be concerned with is inflation and the economy. First is consumer confidence. The University of Michigan consumer confidence index for the U.S. economy increased to 51.1 in July 2022 from a record low of 50 in June. This beat the initial forecast for July of 49.9 but remains low by historic standards. What gives us great pause for concern is that the survey’s expectations gauge declined again in May to 47.3, the lowest since May of 1980, when it registered 47.5. Second is inflation. There are three measurements of inflation which all seem to be not only forecasting higher costs for consumers and even higher levels in the future. The consumer price index increased to 9.1% from a year ago in June, well above most economists estimates and considerably higher than the 8.6% rate the economy faced in May. The core consumer price index rose 5.9% in June, above its preliminary estimate of 5.7%. Inflation adjusted hourly wages are down 3.6% from a year ago. The producer price index which reflects wholesale prices, and many believe forecasts future trends and consumer prices was up 11.3% in June, relative to a year ago. The core PPI was up 6.4% in June. Finally, inflation for all imports to the U.S. was up 10.7% year over year from June 2021, while U.S. exports saw an inflation rate of 18.2% year over year in June 2022. Currently, Americans are experiencing lower gasoline prices which unfortunately are being offset by higher food, housing, and interest rate costs. Third, are we in a recession? Perhaps the most important definition of a recession is that a recession is when your neighbor loses their job while a depression is when you lose yours. The more common textbook definition of a recession is when an economy experiences two negative back-to-back quarters of GDP growth. The national bureau of economic research (NBER) defines a recession as a significant decline in economic activity spread across the economy that lasts more than a few months. The six broad-based categories the NBER tracks are real personal income less transfers, non-farm payrolls, real personal consumption expenditures, real manufacturing and trade sales, household employment and industrial production.

Since U.S. GDP for Q12022 came in at negative 1.6%, we believe the U.S. economy will be in recession if preliminary Q2 U.S. GDP registers a negative number when it is released later this month on July 28. Current U.S. Treasury Secretary Janet Yellen will likely dispute the call for a recession as she will argue current industrial production and employment are too rosy for the economy to be in recession. However, since the end of World War II, we have never not had a recession even using NBER modeling when the U.S. has experienced two negative back-to-back quarters.

Conclusion

We believe the United States is the strongest overall economy in the world today. However, it is facing an arduous future while becoming less friendly to business and entrepreneurship due to mounting rates of inflation, a call for more government spending and regulation, and mounting pressure for higher taxes on business and the wealthy coming out of Washington. Instead, we believe the Biden Administration and the Federal Reserve need to take a pagw from the Reagan/Volcker playbook and cut taxes and regulations while tightening the U.S. money supply. It worked in the early 1980’s and it will work again now. We fear that any other action coming out of Washington will lead to a deep and prolonged recession. 

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at: tgnash@northwood.edu. The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University. This month’s publication was co-authored by McNair student scholar, Brad Getchel. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, visit:  http://www.northwood.edu/media/publications/. For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.

Northwood University is committed to a policy of nondiscrimination and equal opportunity for all persons regardless of race, gender, color, religion, creed, national origin or ancestry, age, marital status, disability or veteran status.  The University also is committed to compliance with all applicable laws regarding nondiscrimination. Northwood University is accredited by the Higher Learning Commission and is a member of the North Central Association (800-621-7440; higherlearningcommission.org).

APRIL 2022 ECONOMIC OUTLOOK

Introduction

Milton Friedman argued, "inflation is always and everywhere a monetary phenomenon that is produced only by a more rapid increase in the quantity of money than output (goods, services, and/or assets).”

Key March / Early April Data

Positive and Negative Signs

The Standard and Poor’s 500, Dow Jones Industrial Average and NASDAQ have all finished down since April 1, while West Texas Intermediate Crude was down in mid-April from its March high, trading at 106.54. The 10-Year Treasury Bond Yield closed Friday at almost 2.83%, a near 3-year high, with the 30-year fixed home mortgage interest rate closing at 5% for March, up roughly 60% since the beginning of the year. Finally, the University of Michigan’s Consumer Sentiment Survey was up slightly in March, but still dramatically below its all-time high.

Current Issues

Milton Friedman was awarded the Nobel Prize in Economics in 1976 for his path-breaking work on monetary policy, inflation, and the business cycle. Dr. Friedman established a strong correlation between erratic and excessive government monetary policy, its over-stimulation of the economy and the subsequent recessions or depressions that have followed in the United States.

Current U.S. monetary policy has taken consumer price inflation from 1.4% on an annualized basis in January 2021 when President Biden was elected to 8.5% on an annualized basis at the end of March 2022.  If you extrapolate the March monthly consumer inflation rate of 1.2% over 12 months, the yearly inflation rate would be 14.4%.  Historically, inflation rates at this level have only

been brought under control by economic recession or depression. 

Excessive inflation plus the following three indicators lead us to believe a recession is on the horizon for the U.S. economy over the next 12 to 18 months.

1.     Inverted Yield Curve

An inverted yield curve has been a precursor for each recession since 1955, with only one exception to that rule. The two-year treasury rate of 2.337% inverted to the 10-year treasury rate of 2.331% on April 1, 2022. This last happened in 2019 and then the U.S. entered a recession in 2020. The five-year treasury rate of 2.56% inverted to the 30-year treasury rate of 2.55% on March 28, 2022. This inversion last happened in 2006. The FED is ramping up short-term interest rates to curb rampaging inflation, which stood at 8.5% at the end of March 2022. A major factor to watch is the impact of higher short-term rates on bank lending and consumer borrowing. This double-edged sword could push the country toward a recession as banks pull back from lending due to lower yields on loans while pushing up short-term rates for consumers who need to use more of their discretionary income on debt service.

2.     The “Rule of 4%”

Noted Neo-Keynesian economist and former U. S. Treasury Secretary Larry Summers has been one of the few well-known economists friendly to the Biden Administration that has argued for more than a year that inflation is non-transitory and is the creation of excessive government spending and expansionary monetary policy. Summers’ research has also pointed out that 100% of the time since the end of World War II, when the U.S. Consumer Inflation Rate rises above 4% and the U. S. unemployment rate falls below 4%, the over-stimulation of the U. S. economy has been the result as well as a recession within two years. The “Rule of 4%” recently took place when the U.S. unemployment rate dipped below 4% in December 2021 with inflation above 4% simultaneously. 

3. Used Car Prices as a leading indicator of recession

Former U.S. Federal Reserve Chairman Alan Greenspan used to argue falling general U.S. used car prices would directly or shortly thereafter be accompanied by reduced sales of used cars. He noted this correlation would occur during high inflationary periods when inflation increased faster than wages, resulting in a decline in real incomes. When this occurs, consumers have reduced purchasing power and are worse off economically. The result is the slowing economy and eventually a recession or depression. Prior to March, U.S. used car prices were up roughly 40% on an annualized basis. However, in March 2022, used car prices were down 3.8%, according to the U.S. Bureau of Labor Statistics, while sales of used cars less than 10 years old were down 27% compared to March 2021. Buyers of used cars are now taking 171 days to shop compared with 89 days in March 2021. The recent Fed policy change to raising interest rates will have multiple impacts on the economy. Rising interest rates should slow down the economy as the cost of financing homes and automobiles and other large ticket items will be more costly. This is evident as noted in the slowing of used car sales and the sharp increase in mortgage rates from below 3% for 30-year mortgages to touching 5% in mid-April. 

Conclusion

In addition to the above-noted data, the U.S. Producer Price Index (PPI) for March registered its highest level in its 12-year history at 11.2% (trailing 12-month growth), with a forward-looking annualized rate of 16.8%. The previous data is exacerbated by the fact that the Federal Reserve GDP Now estimator produced by the Atlanta Federal Reserve Bank is calling for a GDP growth rate of only 1.1% for the U.S. economy in the first quarter of 2022, which is much more optimistic than Goldman Sachs, which is calling for only 0.5% growth in Q1 2022. Former Trump Administration Chair of the President’s Council of Economic Advisors Dr. Kevin Hassett, using a similar analysis to Alan Greenspan’s on declining new and used car sales in March, believes the U.S. economy may

already be in recession or certainly heading in that direction. Finally, we are holding to our earlier prediction that there is a 60% chance the U.S. economy will be in recession by the end of the summer of 2023, if not sooner.

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at tgnash@northwood.edu. The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University. This month’s publication was co-authored by Nash and McNair Center Scholar Professor James Hop. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, visit http://www.northwood.edu/media/publications/. For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.

Northwood University is committed to a policy of nondiscrimination and equal opportunity for all persons regardless of race, gender, color, religion, creed, national origin or ancestry, age, marital status, disability or veteran status.  The University also is committed to compliance with all applicable laws regarding nondiscrimination. Northwood University is accredited by the Higher Learning Commission and is a member of the North Central Association (800-621-7440; higherlearningcommission.org).

LATE APRIL/EARLY MAY 2022 ECONOMIC OUTLOOK

Executive Summary

Late May/Early June 2022 Economic Outlook

The major causes of our current inflation-driven crisis are the roughly $6 trillion in largely excessive spending the Trump and Biden Administrations spent in the name of COVID relief and economic recovery; President Biden’s reregulation of the U.S. economy; and the dramatic expansion of the U.S. Federal Reserve Bank’s balance sheet from $4.14 trillion (January 2020) to about $9 trillion (May 2022). 

U.S. fiscal, monetary and regulatory policies since early 2020 are the primary cause for a pending recession over the next 12 to 18 months.

Many in Washington have argued that inflation is a global phenomenon and Biden’s policies are not responsible for the high inflation levels in the United States. Including the rest of the world, the Biden Administration claims U.S. inflation is largely due to supply chain issues and the war in Ukraine.  We disagree.

A recently-released study from the Organization for Economic Cooperation and Development (OECD) shows U.S. inflation at the end of March 2021 at 2.6% and 8.5% at the end of March 2022. Over the same period, most of the largest European economies — countries much more directly impacted by the war in Ukraine — showed substantially lower rates of inflation. We believe differences in inflation rates can be attributed to less government intervention among our European allies over the same period. Consider the following: Inflation in the United Kingdom was 1% at the end of March 2021 and 6.2% at the end of March 2022; Switzerland had inflation of -0.2% at the end of March 2021 and 2.4% at the end of March 2022; Sweden had inflation of 1.7% at the end of March 2021 and 6.0% at the end of March 2022; Italy had inflation of 0.8% in March 2021 and 6.5% in March 2022;  Germany had inflation  of 1.7% in March 2021 and 7.3% in March 2022; and France had inflation of  1.1% in March 2021 and 4.5% in March 2022. The same holds true with other global economic powers, like South Korea, whose inflation was 1.9% at the end of March 2021 and 4.1% at the end of March 2022; and Japan, which had inflation of -0.4% in March 2021 and 1.2% in March 2022. Finally, Canada experienced inflation of 2.2% in March 2021 and 6.7% in March 2022. 

In the case of the above-mentioned economies or other OECD countries with inflation rates close to ours or higher, a strong correlation between inflation and excessive monetary, fiscal and/or regulatory policy exists — similar to what took place in the United States over the same period.

Current Issues

For months, we have been discussing the growing number of economic signals that a recession will be part of the U.S. economic landscape sometime between Q2 2022 and the end of 2023 at the latest. In addition to our previous discussions on inverted yield curves, the rule of 4%, falling used car prices and tracking quarterly U.S. GDP, the following indicators add fuel to the argument for a pending recession.

1. Stock market parallels and the Great Depression

On May 20, 2022, the Dow Jones Industrial Average (DJIA) experienced its eighth straight week of decline – not seen since 1932. In fact, the Dow Jones Industrial average has been volatile throughout President Biden’s administration (30,930.52 on Inauguration Day; an all-time closing high of 36,799.65 on Jan. 4, 2022; 31,253 on May 20, 2022; and, just under 31,393 on June 10).

2. The National Federation for Independent Business (NFIB)

The NFIB, tracks quarterly small business economic trends (since 1973) and conducts monthly surveys (since 1986). Its latest survey data released on April 12 reflects an all-time record low for business confidence. 

3. The University of Michigan Consumer Sentiments Index

The University of Michigan’s Consumer Sentiments Index, perhaps the most respected tool for tracking consumer confidence, was down 14% from May in its preliminary June release last week. The June preliminary report came in at 50.2, down 8.2 from May, registering its lowest recorded value since the recession of 1980.

4. Most recent CNBC’s CFO Council survey results

In a recent CNBC survey of top corporate chief financial officers (CFOs), the consensus is for the Dow Jones Industrial Average to decline 18% from its 2022 high to roughly 30,000 before it can realize a sustainable rebound. Every CFO in the survey believes a U.S. recession can’t be avoided, with 68% predicting a recession by the end of the first half of 2023, while the remaining 32% believe a recession will occur by the end of 2023 or sooner. 

5. The S&P 500 has declined more than 20% since January 2022.

The investment research firm CFRA found that S&P 500 bear markets on average begin seven months before the start of a recession. A bear market is defined as a decline of 20% or more in a broad-based stock market like the S&P 500. This correlation has resulted in recession nine out of the 12 times it has occurred since 1948. If the data holds true for the 10th time since 1948, a recession can be expected in early August, seven months from the S&P 500’s all-time high in January 2022.

Unfortunately, the tell-tale signs of a recession continue to grow.

Conclusion

Recently-released U.S. CPI and PPI data indicate that inflation is not under control and the Federal Reserve will need to take continued strong action similar to its June decision if it is to tame inflation. However, we do not believe our current Federal Reserve Board has the policy knowledge, courage and time to reduce inflation while navigating a soft landing and avoiding a recession.

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at tgnash@northwood.edu.  The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University. This month’s publication was co-authored by McNair student scholar Brad Getchel. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, visit:  www.northwood.edu/media/publications/. For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.

February/Early March 2021

Introduction

According to a recently released study by the World Bank and the International Monetary Fund (IMF), the United States economy performed well relative to the global economy and especially the advanced economies of the world, including Europe in 2020. While the overall global economy shrank 3.5 percent in 2020, and the advanced economies of the world shrank 4.9 percent with Europe declining 7.3 percent, the U.S. economy declined 3.4 percent. What is most promising is the U.S. is expected to outpace most major economies in economic growth again in 2021 with expected growth of 5.1 percent, while the advanced economies of the world and Europe see expected growth rates of 4.3 percent and 4.2 percent respectively. However, the IMF report has the U.S. only growing at 2.5 percent in 2022 with the advanced economies of the world and Europe growing at 3.1 percent and 3.6 percent respectively. The study was produced in January of this year and leads us to be concerned regarding the U.S. economy in 2022 especially given the increased regulatory environment being proposed by the Biden administration as well as the new tax structure and increases the President and Democrats are now discussing.

Key February / March Data

Positive and Negative Signs

U.S. sales of automobiles, light trucks and SUV’s totaled an estimated 15.7 million on an annualized basis for February, considerably lower than the 16.6 million-pace in January. It was also the second time in four months sales have been below an annualized rate greater than 16 million. February sales of domestically produced vehicles declined to 11.9 million units in comparison to 12.8 million in January, down 6.6 percent, while imports fell to 3.7 million, compared to 3.8 million on an annualized basis in January, a decline of 2.9 percent. Once again, light trucks and SUV’s made up roughly 80 percent of all vehicles sold in February.

The Standard and Poor’s 500 stock market closed today at 3968.94, up 5.66 percent so far this year. The Dow Jones Industrial Average is up 7.66 percent so far in 2021, while the NASDAQ is up 4.43 percent over the first 2.5 months of 2021. The U.S. unemployment rate finished 2020 at 6.7 percent and has continued to decline as the economy improves. At the end of February, U.S. unemployment was down to 6.2 percent nationally.

On the COVID-19 front, the United States has conducted more than 380 million COVID-19 tests and administered just under 110 million COVID-19 vaccines nationally. The U.S. had signed agreements to purchase 800 million doses of three different COVID-19 vaccines under the Trump Administration and has just purchased another 100 million under the Biden Administration. Many medical experts believe the United States will reach herd immunity by June or July of this year, with all who want to receive the vaccine able to do so.

Current Issues

The recent $1.9 trillion COVID Relief Package signed into law by President Biden brings the total government spending for various direct and not-so-direct related programs designed to “fight the pandemic” to $6 trillion dollars. We believe much of the dollars included in the most recent bill is irresponsible especially since almost $1 trillion of previously-allocated monies remains unspent and more than a trillion dollars signed into law by President Biden has nothing to do with fighting COVID-19, and much of said money not due to be spent for 3 or 4 years. In addition, the U.S. government is now contemplating an additional $3-5 trillion for U.S. highway and technology infrastructure programs as well as the Green New Deal. The current national debt is now $28.06 trillion and growing and 129.81 percent of U.S. GDP. Even more alarming is that the national debt as a percent of U.S. GDP was only 106 percent when President Trump took office.

On top of massive new government spending programs being considered by the Biden Administration, Democrats and the President are openly discussing increasing income taxes and creating new taxes on energy, which certainly will have a negative impact on a slowing U.S. economy especially if the IMF is correct. Not only could we have a slowing economy due to higher tax rates, we might realize “stagflation” for the second time in U.S. economic history. Recall during the 1970’s we had rising inflation rates and a slowing economy; something the Keynesian economists told us could never happen.

Currently, President Biden and his team have openly discussed their desire to increase the corporate income tax rate from its current globally competitive rate of 21 percent to 28 percent, some have even suggested 35 percent, making it again among the highest in the industrialized world. The Biden Administration is calling for an increase in the personal income tax for the top 1 percent of Americans, as well as increases in taxes on capital gains, dividends and estate taxes. In addition, Senator Elizabeth Warren has called for the implementation of a 3 percent wealth tax, which would annually tax any wealth above $50 million at 3 percent. One can imagine that if your wealth above $50 million shrank or did not grow by more than 3 percent, this wealth tax would automatically make the wealthy who largely become rich by creating new businesses and jobs, less wealthy and less capable of maintaining jobs or producing new ones.

Conclusion

In addition to the potential for increased taxes on income outlined above, the Biden Administration is strongly considering a carbon tax to be administered on both oil and natural gas, and possibly coal. This tax would not only make said businesses less profitable, it would drive up the price of by-products like gasoline and make it more costly to operate an automobile. We are worried that a less friendly business environment, driven by higher taxation and increased regulation of the economy will lead to a slowing U.S. economy by the end of 2021, taking a robust recovery and turning it into a recession by the end of 2022.

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at: tgnash@northwood.edu or (989) 837-4323. The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, please visit mcnair.northwood.edu/mcnair-economic-outlook. For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.

September/Mid-October 2020

Introduction

This past weekend, several members of my immediate family and I were discussing the 2020 political elections including the race for the presidency. One depending on their political party can make the case for giving President Trump credit for all the blame and little to no credit for the many good things that have happened in the U. S. economy since the beginning of 2020. Let’s examine the data below in an apolitical way.

Key September/Mid-October Data

Positive and Negative Signs

The Covid-19 virus caught many Americans and politicians at all levels somewhat off-guard with numerous mixed messages coming out of Washington, D.C. and state capitals across this country in the early stages of the pandemic. It is also true that America and Americans rallied in ways most would have thought impossible in early to mid-March as the U.S. began to marshal a coherent across the board challenge to this deadly outbreak. Early on experts predicted the loss of American lives could reach two million or higher by the end of the year if we did not respond properly, while the current number of deaths at roughly 225,000 is too high. It is a mere shadow of the initial dire forecast. Doctors, nurses, hospitals, truckers, manufacturers have all stepped up to introduce and deliver new drugs, new treatments, needed supplies from masks to ventilators and get them to where they were needed seemingly overnight. Let’s examine the economic facts.

Current Issues

At the end of March, the future of our economy with COVID-19 looked dire: The Dow Jones Industrial Average had declined by 38.4 percent from its all-time high in mid-February; the NASDAQ (-32.5 percent) and the Wilshire 5000 (-37 percent) also fell sharply from record highs. On April 5th, Nobel prize winning economist Paul Krugman predicted 20 percent unemployment by mid-April with record numbers of Americans out of work. Investment guru Mohammad A. El-Erian predicted in April U.S. GDP would decline between 10-14 percent on an annualized basis. Recent data reveal the overall U.S. economy was much stronger going into the downturn and rebounded more assertively than most expected! Consider the following:

The U.S. Unemployment Rate for April reached 14.7 percent and then unexpectedly declined. The U.S. Unemployment Rate fell to 13.3 percent in May with a surprising 2.7 million jobs created, followed by a shockingly low Unemployment Rate of 11.1 percent in June creating an astounding 4.8 million jobs. In fact, the U.S. unemployment rate as of the end of September was 7.9 percent with 11.4 of the 22.1 million jobs lost to the COVID-19 pandemic having been recovered as of a recent October 2020 U.S. Labor Bureau of Labor Statistics report. On the real estate front, sales of new single-family homes in May were 676,000 which exceeded May 2019 results. The good news continued over the summer with sales of new single-family homes in August were at a seasonally adjusted annual rate of 1,011,000 according to the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.8 percent above revised data for July and was followed by a preliminary increase of 8.5 percent or almost 1.1 million in sales for September.

The Institute for Supply Management’s (ISM) manufacturing index saw economic activity grow to 43.1 percent in May and climbed another 9.5 points in June to 52.6 percent while closing September at 54.5 percent. Historically, when the index surpasses 50, it signals an end to a manufacturing recession. While the ISM non-manufacturing (service) index reached 57.1 in June and 57.5 for September.

Northwood University's McNair Center now predicts 2020 U.S. automobile light truck and SUV sales will reach 15 to 15.1 million units sold, 3 million more than many experts forecasted in March.

Oil prices briefly turned negative in late April raising the fear of a long price war between Russia and Saudi Arabia that would devastate U.S. oil interests in multiple states resulting in numerous bankruptcies. Oil recently closed above $40 a barrel, leaving many surprised and relieved the U.S. Oil Industry took less of a hit than originally expected.

Goldman Sachs in July called for -4.6 percent annual growth for 2020 after -31.4 percent growth was reported in the U.S. economy in Q2. The Atlanta Federal Reserve Bank’s GDPNow model estimates positive real U.S. GDP growth of 35.3 percent in Q3; with the Wall Street Journal’s survey of economists predicting much slower growth of 3.8 percent real GDP in Q4. The respected Kiplinger’s Investment newsletter calls for historically respectable real U.S. GDP growth of 3.8 percent in 2021.

The Conference Board’s June U.S. Consumer Confidence Index soared by 13.3 percent from 86.6 in May to 98.1 in June, after declining a bit over the summer, the index closed the month of September at 101.8. Furthermore, gasoline sales jumped 15.3% in June and remain high over the summer and into September. Even though gasoline sales have been impressive since June, sales for the first 9 months of 2020 trail those of 2019 by roughly 9 percent; a shear fire sign that the U. S. economy has recovered will be when annual miles driven get back to 2019 levels. At the end of February, we had only tested 316 Americans for the COVID-19 virus; today more than 130 million tests have been administered to date.

Finally, from their March lows: The Dow Jones Industrial Average is up 56.47 percent; the Wilshire 5000 is up 64 percent (above its pre-COVID all-time high); and, the NASDAQ is up roughly 75 percent (above its pre-COVID all-time high) at 11,548.28.

Conclusion

Today, we need more celebrating and less blaming across America as no one I know and probably you know was predicting the U.S. economy would recover so soon especially to the degree outlined above. It is time for America to celebrate her great successes in fighting COVID-19 while doing its best to keep the American economy afloat as well.

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at: tgnash@northwood.edu or (989) 837-4323. The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, please visit mcnair.northwood.edu/mcnair-economic-outlook. For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.