American presidents hate the word that starts with the letter MM (actually with R). They hate it especially when elections are coming and going (in the US, any election is always coming and going). The reason is that that word rhymes with electoral defeat.
Recession, in English, is not just a reflection of a mood. It requires careful proofs and scientific consensus. It used to be said that a recession is the result of “two consecutive quarters of negative growth”, or, in human terms, a contraction of the gross domestic product. Thirty years ago, President George W. Bush’s desperate opposition to the use of the word “recession” took on farcical proportions. His avoidance of her was a constant source of ridicule in satire shows.
According to his critics, Joe Biden became a “recession denier” last week. On Thursday, the Ministry of Commerce in Washington announced that the GDP of the USA – the total of all goods and services produced on its soil – decreased by 0.9% in the second quarter of the year. In the first quarter, the GDP decreased by 1.6%. “Not a recession “, said Biden and his top advisers. But not only the White House, the political one, said that. The Governor of the Central Bank, Jerome Powell, also declared that the new data do not weigh against a recession.
US President Joe Biden / Photo: Associated Press, Susan Walsh
The Republicans, who hope to wrest the Congress from the hands of the Democrats in the upcoming elections in November, of course announced the coming of the “Biden recession”. The editorial pages of the ‘Wall Street Journal’, which are the most important newspaper of the right in the US, announced not just the “Biden recession” but the “Biden stagflation”. This is the scariest economic political insult in the US, a combination of the words “stagnation” and “inflation”.
Goldilocks and the Three Bears
The Republicans hope to win the elections mainly thanks to the economic distress, of which inflation is the main manifestation. In the last 12 months, it stood at 9.1%, its highest rate since 1981. But the two claims – recession and stagflation – currently do not stand the test of numbers. Although output decreased, private consumption increased by one percent, and unemployment in the last four months stood at 3.6%, a figure that economists consider equal to zero. For comparison, during the Bush Sr. recession, 30 years ago, unemployment reached 7.8%.
So what is going on here? One explanation is that the output data is temporarily affected by an uncharacteristic accumulation of inventory in the businesses. Merchants didn’t know exactly what to do during the recovery from the previous, short but severe recession of the first days of the Corona virus. In order to meet the demand and also to overcome the traffic jams in the supply chains, everything – huge, big, small and tiny – have stockpiled.
25 years ago, when the US economy was doing wonderfully in the mold of “Goldilocks and the Three Bears”, the classic children’s story in which Goldilocks tastes the soup that is not too hot and not too cold, and sleeps in a bed that is not too big and not too small. In the 1990s, in the midst of the longest period of growth in American history, the success of growing without inflation and without unemployment was attributed in part to computerization, which allowed merchants to adjust their inventory with perfect success to demand levels.
Well, the soup got too hot, and now there’s no choice but to cool it. The central bank of the USA, the Federal Reserve, cast a chilling spell on him last week, with an additional interest rate increase of 0.75%. He raised the interest rate by a similar rate in June, and the signs indicate that he will do so once more right after the summer break, in September. Although Governor Powell does not think that the economy has fallen into a recession, he has already made it clear that the fear of a recession will not let him down. He repeats that his main task now is to lower inflation.
Fed Chairman Jerome Powell / Photo: Associated Press, Manuel Balce Ceneta
houses and chips
The effect of interest rate increases is not immediate. In the past, it took months, even years, to reduce inflation. But it seems that the interest rate hike is already showing its signs. Construction starts, which are a traditional measure of economic activity, fell by 2% in June. Mortgage applications are now at their lowest level since the subprime crisis, which economists prefer to call “the Great Recession” (2008-2009). One week in June, 15% of all home purchase contracts did not reach a conclusion rule. Sales of existing homes have been decreasing month after month for six months.
Another reason for the shrinking GDP is the critical shortage of chips. It affects every possible field of technology, but its effect is particularly severe in the automotive industry. Congress allocated 52 billion dollars last week to encourage the production of chips and semiconductors on US soil. When this happens, the shortage of vehicles will be eased. Of course, if China decides to attack Taiwan, which is the global center of the chip industry, all of the above will immediately lose its validity.
The decision as to whether the last quarter’s data warrants a diagnosis of a recession rests interestingly with eight academic economists who sit on the “Dating Committee on Business Cycles” of the “National Bureau of Economic Research” (NBER). They are in no hurry. Their decision-making process may take many months, and the decision will likely be announced long after this recession is over, if indeed it is a recession. As for the two consecutive negative quarters, the US government statisticians may yet correct the last quarter’s figures, and find that it was positive, at least nominally.
The Inflation Reduction Ordinance
So what’s the point? Who cares if there is something called a “recession”? Politicians care. Presidents do not tend to be re-elected if a recession occurs under their presidency before a tide is sufficient to correct it. Bush Sr. was one who lost because of a recession, in 1992; Also Jimmy Carter in 1980. A quick and dramatic recovery saves all boats from the wreckage, as Ronald Reagan learned in 1984. But no one expects a Reagan-era recovery
Senate Republican Minority Leader Mitch McConnell, who is hoping to return as majority leader following the election, declared last week, “Democrats will [מדונלד טראמפ] An economy is ready for a historic recovery, and yet they ran it aground.’ It’s a powerful message, whether it’s accurate or not. He alone may tip the scales in favor of the Republicans.
In a week of dismal economic news, Joe Biden managed to extract some good news from the jaws of Congress. We mentioned the multi-billion dollar subsidy to the chip industry. But the jewel in the crown was a law, which the Democrats gave the sexy name “The Inflation Reduction Ordinance”. It includes 433 billion dollars of expenses and 739 billion dollars of revenues. The main expenditure, 369 billion dollars, is for the promotion of green energy, including tax breaks for electric vehicle and hydrogen vehicle buyers; $64 billion in subsidies for indigent health insurers; and an initiative to reduce the prices of medicines for the elderly. The source of income in the new law is a minimum tax of 15% on companies.
This law came as a surprise, months after it seemed that disagreement within the Democratic Party condemned an earlier version of it to the Geniza. The question now is whether the law will convince voters to reward the Democrats, or if all this comes much too late. A CNN poll shows that in the eyes of 68% of Americans, the recession has already arrived. 80% give the president a negative score for his handling of the economy. The inscription is already visible on the wall of the White House.
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