Thursday, July 28 2022
There is an economic phrase that emphasizes how important ‘anticipation’ is in affecting the health of an economy. This phrase is called “anticipatory spending.” Should the US population (with disposable income) anticipate a recession, they will behave accordingly. This behavior would include spending less, saving more, and making conservative decisions on large purchases. The personal spending behavior shifts from long-term strategy to short-term tactics. This is because the baggage that comes with recessions includes losing jobs, lower prices, and shrinking demand, all of which exacerbates poorer economic performance and activity. Anticipation feeds a recession. By contrast, if the population anticipates a robust economy, spending increases, especially future investments in real estate and business expansion, which also help accelerate a growing economy.
This explains why the language is so important to both sides of the political aisle. The administration is pushing back hard on labeling the current economic state in the US as a “recession”. While the technical definition of recession is two consecutive quarters of negative growth for the gross domestic product (GDP), the ‘recession’ label itself will cause anticipatory behaviors, that feed recessionary economic dynamics. The administration does not want to see an economic spiral downward, especially in an election year.
Some suggest that the political right wants to apply the technical definition of ‘recession’ to address the reality the US economy is facing, which includes addressing inflation. I will give conservatives the benefit of the doubt that they do not want to exclaim a recession for political advantage during an election year. Rather, conservatives may feel that an honest declaration of a recession will enable the application of a clear-eyed cure to the cause(s) of this recession with expedition. We all know inflation is happening and we know inflation and recession are linked.
One condition that can precede a recession is inflation. A recession can cure inflation, but at an economic cost. That cost comes largely in the form of job loss and is borne primarily by the middle and lower socioeconomic groups, who were also the segments of the population most harmed by the inflationary impacts of lower real wages and purchasing power. Blunt force tools are being used to fight inflation. The Fed’s hammer is to increase interest rates, which will make borrowing more expensive, thus driving reduced borrowing for big ticket purchases and small business expansion. Demand for goods will decrease, lower prices will follow, and inflationary pressure will ease.
However, greater precision will be required to manage and stave off a declining economic spiral. The administration may be voting on a spending package that will have a mixed bag of stimulus (energy incentives) and anti-stimulus (increased taxes) features. This is being done to more precisely manipulate large economic drivers to avoid a deep recession with increasing prices (stagflation). Stay tuned as the political parlor games continue.