The Economy Is Starting to Buckle

By Jim Geraghty

Monday, September 26, 2022

 

About two weeks ago, a smart friend of mine who works on supply-chain issues observed that, “Based on what I’m hearing throughout all the industries that I work with, this month’s job report might be brutal. People are getting skinny everywhere they can, so that they don’t lose their [butts]. Unfortunately, that means huge groups of people getting fired.” (“Getting skinny” means cutting operating costs.)

 

And, like everything else, once you start looking for something, you start seeing signs of it everywhere.

 

Meta — you know, Facebook — plans “to cut expenses by at least 10 percent in the coming months, in part through staff reductions.” Google is eyeing similar cuts, with CEO Sundar Pichai characterizing it as “being a bit more responsible through one of the toughest macroeconomic conditions underway in the past decade.” Twilio has announced plans to lay off 11 percent if its workforce, and Snap has announced plans to lay off 20 percent of its workforce.

 

A lot of big companies, even outside the tech sector, are announcing the elimination of executive positions. The Gap is eliminating 500 corporate jobs. Boeing has announced that it will eliminate about 150 positions in finance and accounting in October. Last month, Walmart announced that it would eliminate 200 corporate jobs.

 

FedEx is enacting a hiring freeze and closing more than 90 FedEx Office locations.

 

It’s not just big brand companies: It’s also an ice-cream plant in New York; it’s also a slew of hospitals nationwide. God help you if you work in real estate: “Some of the biggest players in the real estate industry, including RE/MAX, Redfin and Wells Fargo, have announced layoffs in recent months totaling thousands of jobs. Industry analysts are projecting the cuts could eventually be on par with what was seen during the housing crash of 2008.”

 

None of these individual company moves, by themselves, are likely to make a big difference in the national jobs numbers, and you can find companies announcing layoffs in any month. But cumulatively, these announcements suggest that we’re in a period of not-so-subtle belt-tightening. Businesses doesn’t know what to expect in the coming months, except higher costs to heat their facilities this winter. The stock markets are jittery. Sooner or later, those rising interest rates will reduce customer demand — which should reduce inflation, but will also lower sales, profits, and eventually, jobs.

 

Of course, in some people’s minds, the economy can’t be sputtering, because the guy they like is in the White House, and the party they prefer controls Congress. And the pressure to align an assessment of the economy with partisan needs is never stronger than in the final months and weeks before Election Day.

 

Last week, President Biden attended a Democratic National Committee event held at National Education Association headquarters — yet another sign of how those two organizations are now so symbiotic that they’re becoming indistinguishable — and took a victory lap about how well the economy is doing:

 

We passed the American Rescue Plan, which lifted this nation from economic crisis to economic recovery. And every single Republican voted for it. [Note: Biden meant every single Republican voted against it.] Nearly 10 million more jobs have been created since I’ve been President — the highest number of jobs in that period of time of any President of the United States of America. We have a 3.7 percent unemployment rate, the lowest in 50 — more than 50 years; a record number of new — record number of new small businesses created; and over 668,000 new manufacturing jobs in America.

 

The same day, White House press secretary Karine Jean-Pierre offered this remark:

 

This is one of the strongest job markets that we have seen on record. And, and so, what we are seeing – and I’ve said this before; you’ve heard this from Brian Deese — is a transition to a more steady and stable growth. And that’s what we’re currently seeing and in the process of moving the economy into.

 

That “steady and stable growth” she’s referring to is two consecutive quarters of declining GDP. The White House message is, “You’ve never had it so good.”

 

Inflation is too much money chasing too few goods. We understand why there’s too much money sloshing around in the economy — the government keeps borrowing more and spending more, giving people more money to spend when the supply of goods isn’t increasing as quickly. But what is making the supply of goods so limited? The president himself said that the pandemic is over, so the only remaining pandemic-related supply-chain problems should be seen in sectors that rely on imports from China.

 

But as fall turns to winter, the sputtering U.S. economy may be buckling under two large-scale problems.

 

First, energy prices. We just endured a summer of record gasoline prices; now we’re entering a winter of significantly rising electricity and heating prices. The U.S. Energy Information Association calculates that the average price of electricity for residential consumers is up 7.5 percent from last year:

 

Higher retail electricity prices largely reflect an increase in wholesale power prices driven by rising natural gas prices. The Southwest region has the lowest forecast wholesale prices in 2022, averaging $69 per megawatthour (MWh), up 25 percent from 2021. The highest forecast wholesale prices are at more than $100/MWh in ISO New England (up 96 percent from 2021) and New York ISO (up 124 percent from 2021).

 

The National Energy Assistance Directors Association projects that:

 

The average cost of home heating is estimated to increase by 17.2 percent since last winter heating season, from $1,025 to $1,202. This would be the second year in a row of major prices increases. Between 2020-21 and 2021-23, the cost of home energy would increase by more than 35 percent… These are the highest prices in more than 10 years.

 

Because unleaded-gasoline prices are down from their mid June record highs, one might think that those who heat their homes with oil might be in better shape. But supplies are strikingly low, particularly in the northeastern states:

 

Diesel fuel and heating oil, which comprise the distillate category, are 63 percent below the five-year average in New England and 58 percent below the same average from Maryland to New York, according to a survey by the Department of Energy. Gasoline inventories are not as bad, but are still at their lowest levels in nearly a decade along the entire East Coast.

 

(Note that the decline in unleaded gasoline prices stopped last week. The national average for a gallon of unleaded regular gasoline declined to $3.67 on September 18, and since then, it has climbed a few cents to $3.72. That is still really high by historical standards!)

 

Lower supply of natural gas and oil mean higher prices; higher prices for natural gas and oil mean higher electric bills for both homes and businesses, with businesses passing along those costs to customers. This exacerbates inflationary price hikes.

 

The second large-scale problem is housing and land: There’s compelling evidence that the U.S. is experiencing a worsening housing shortage that started in big cities such as New York, Los Angeles, and Washington, D.C., but spread to more and more parts of the country in recent years. Higher demand and stagnant supply for housing mean that home-sale prices and rents increase, sometimes dramatically. Freddie Mac found that 60 percent of renters and 24 percent of homeowners spend more than 30 percent of their monthly income on housing, and almost half of all respondents are concerned about making housing payments.

 

And once again, this is largely a consequence of policy choices. This morning, the Wall Street Journal offers the ominous headline, “The U.S. Is Running Short of Land for Housing,” and lays out how the shortage is a consequence of policy decisions:

 

Land-use restrictions and a lack of public investment in roads, rail and other infrastructure have made it harder than ever for developers to find sites near big population centers to build homes. As people keep moving to cities such as Austin, Phoenix and Tampa, they are pushing up the price of dirt and making the housing shortages in these fast-growing areas even worse. In the Sunbelt, the average price of vacant land per acre more than doubled in the past two years through the second quarter.

 

Meanwhile, this weekend, the New York Times spotlighted the trend of developers tearing down residential buildings to build new high-rises . . . with fewer units than the old building, actually reducing the amount of housing available in the city. “The builders argue that the cost of land and construction is too high for almost anything but luxury condominiums, without new tax incentives or more favorable zoning.”

 

When you combine policies that throw money into the economy and make energy more expensive with policies that limit or even reduce the availability of housing, what do you think you’re going to get? Something like our current circumstances — in which people are spending more and more of their paychecks on housing and energy bills while the price of everything else keeps rising.

 

Oh, and this line over in today’s Politico Playbook caught my eye: “For perhaps the first time in his presidency, Biden has a positive economic story to tell.”