In this tale of two Democratic Treasury secretaries, it was the best of predictions and the worst of predictions. Whom shall we trust on predictions? The Treasury secretary that insists that the US economy is growing at a “rapid rate,” or the former Treasury secretary who, um, actually looks at the numbers?
Let’s start with Janet Yellen, who said that the economy will “slow” without apparently noticing that it had already done so. Recession isn’t “inevitable,” Yellen told George Stephanopoulos. Let’s take Yellen’s longer answer from the transcript:
Treasury Secretary Janet Yellen: The economy has “been growing at a very rapid rate”
The economy shrank last quarter. pic.twitter.com/I2DrUD9KAg
— RNC Research (@RNCResearch) June 19, 2022
JANET YELLEN, SECRETARY OF THE TREASURY: Well, I expect the economy to slow, it’s been growing at a very rapid rate as the economy — as the labor market has recovered and we have reached full employment, it’s natural now that we expect to transition to steady and stable growth. But I don’t think recession is at all inevitable.
Note: The labor market has not fully recovered, and we have not reached full employment. As of the last jobs report, we are still short almost 900,000 jobs from February 2020’s level, plus the population has grown since then (usually between 2-2.4 million a year). We should have created another 2.4 million jobs since then.
Chair Powell, clearly inflation is unacceptably high. It’s President Biden’s top priority to bring it down and Chair Powell has said that his goal is to bring inflation down while maintaining a strong labor market. That’s going to take skill and luck, but, I believe it’s possible. I don’t think a recession is inevitable.
STEPHANOPOULOS: You say it’s not inevitable, but I guess the question is, is it likely? We’re already seeing consumers start to pull back on services, especially some signs that the job market may be slowing as well.
YELLEN: Well, I think consumer spending remains very strong, there’s month-to-month volatility, but overall spending is strong although patterns of spending are changing and higher food and energy prices are certainly affecting consumers and making them change their patterns of spending.
But bank balances are high, it’s clear that most consumers, even lower income households, continue to have buffer stocks of savings that will enable them to maintain spending so I don’t see a drop off in consumer spending as a likely cause of the recession in the months ahead and the labor market is very strong, arguably the strongest of the post-war period. Not only is the unemployment rate near historic lows but there are two job vacancies for every unemployed worker, so the labor market remains extremely strong, unemployment insurance claims near their lowest levels in history.
To be fair, the economy had been expanding pretty rapidly, but it came to a sudden stop in Q1 of this year, with an annualized contraction of -1.4%. In 2021Q4, GDP grew by an annualized 6.9%, and the full year’s growth calculation for 2021 was 5.7%, following a -3.4% in 2020. The negative result in Q1 of this year mainly came from a sharp trade imbalance, where exports fell -5.9% and imports grew by 17.7%.
However, Yellen’s kidding herself if she thinks consumer spending remains “very strong.” It rose slightly in Q1 to 2.7% annualized growth from 2.5% in the previous quarter, but those aren’t “strong” numbers, even while being adjusted for inflation. They’re not bad either, but they’re far off from the double-digit growth figures in the first two quarters of 2021, fueled by two back-to-back stimulus packages, the latter of which was entirely unnecessary and catalyzed an inflation wave. Gross private domestic investment fell off sharply as well after two big quarters in the latter half of 2021, indicating that businesses already saw the writing on the wall in Q1.
Now that interest rates are jumping by leaps and bounds, both consumer spending and business investments will get squeezed hard. Larry Summers makes that point with NBC’s Chuck Todd:
WATCH: @chucktodd: “Can inflation at this point be tamed without triggering a recession?”@LHSummers: “I don’t think there are historical precedents for inflation at the rate we now have it coming down to the target the Fed has set of 2% without a recession.” #MTP pic.twitter.com/m0daKjdIzE
— Meet the Press (@MeetThePress) June 19, 2022
CHUCK TODD: Is a recession, a mild one, necessary in order to tame inflation? Can inflation, at this point, be tamed without triggering a recession?
LARRY SUMMERS: I don’t think there are historical precedents for inflation at the rate we now have it coming down to the target the Fed has set of 2% without a recession. I think all the precedents point towards a recession, Chuck. There’s always a first time for everything. And I don’t want ever to make a forecast with certainty. But if you look at a whole range of indicators, if you look at what’s happened in markets, if you look at the relative levels of interest rates of different durations, if you look at surveys of consumer expectations, and if you look at the simple fact that what drives inflation is supply and demand, supply doesn’t change that fast. And so mostly what you need to do to reduce inflation is reduce demand. And that is a very hard process to control. And so it usually leads to a recession. All of that tells me that, while I wouldn’t presume to be able to judge the timing, the dominant probability would be that by the end of next year we would be seeing a recession in the American economy.
Summers clearly has a better grasp on the numbers and on reality than Yellen does. Yellen has gone from technocrat to shill in this inflationary wave, while Summers has consistently and accurately predicted the results of Joe Biden’s economic policies. YMMV, but if I had to place bets — and in this case, aren’t we all through our pensions and retirement funds? — I’d bet on the person who got it right from the beginning rather than the shill.
We’ll talk more about it this morning, when I’ll be filling in for our pal Hugh Hewitt on his syndicated radio show, airing from 6-9 am ET, live from the home studio deep in the heart of Texas! We will have a great lineup of guests and regular contributors:
- Salena Zito
- Don Caballero from Prison Fellowship Ministries
- Josh Kraushaar
We’ll also take your calls to the show at 800-520-1234, and you can watch the show live at The Hughniverse. There’s a great chat room that goes with it, and lots of original content in the troll-free websurfing experience for subscribers. The audio also streams at HughHewitt.com.