Economists warn of extended inflation, incoming recession

CUYAHOGA FALLS, Ohio—Strap in. That's the message economists are telling members of the rubber industry about the economy ahead.

We stimulated the economy and built strong demand when we were afraid it would "fall off the cliff" at the start of the pandemic, Bill Wood, founder and president of Mountaintop Economics & Research Inc., told those attending the International Silicone Conference. "Now," he said, "we're paying the price."

When the "economic bards" sing their songs of the great pandemic of 2020, he said, they will tell the tales of supply chain bottlenecks, inflation, rising interest rates, labor shortages and—likely—another recession.

Wood told attendees to look at their supply chains more as supply circles and to ditch the days of "just in time."

"The days of 'just in time' are over. The days of low-cost supplier are over. You're going to have to compete on a lot of different value metrics," he said.

"And in order to do that, you are going to have to know more about everybody's business in that circle. Not just your immediate vendor, and not just your immediate customer."

He said there are certain risks in today's supply chain that are not being addressed, noting the current issue with externalized costs that are not "appropriately accounted for" in prices.

"If you think education about supply chains is expensive, try ignorance," he said.

As for inflation and interest rates, Wood told conference attendees to be ready.

"How many of you are actively planning right now for an extended period of inflation in the United States?" Wood asked. "You may want to start thinking about that real hard. I'm not guaranteeing that's going to happen, but from what I've heard today and everything I look at on the data, this is going to be a wrestling match."

And to win this match, Wood said, the Federal Reserve will raise interest rates "in an attempt to put the brakes on demand."

And sure enough, on June 15, the Federal Reserve approved a 0.75-percent increase—the third so far this year, following the approvals of a 0.5-percent increase May 4 and a 0.25-percent increase March 16.

Wood said raising interest rates "usually works," and it's probably going to work this time around, too. But there's a caveat.

"How much are they going to have to raise them, and how fast?" he asked. "That's going to be what determines whether or not we go into a recession."

"We will have another recession," Wood said.

But when this recession hits is anybody's guess.

"Is it going to be next year, in two years, 10 years? I don't know. I honestly don't know," Wood said. "And everybody who's really smart, who is talking and speaking publicly, … (they) don't know either."

As for now, things seem to be humming along.

Even though the GDP experienced negative growth in the first quarter—down 1.5 percent, according to the Bureau of Economic Analysis, Wood said the time for the next recession is not now.

In fact, the economy is experiencing rapid growth with an 8-percent growth rate in consumer demand and spending, as well as a more than 30-percent jump in housing starts following a 3- to 4-percent dip during the pandemic.

And other economists agree.

Roger Tutterow, professor of economics at Kennesaw State University, claimed the manufacturing industry is primed for growth.

The pandemic's recession is over, he said. The economy is growing—just not at the rapid pace we saw following the COVID-19 shutdowns.

Tutterow, who opened at the Rubber News Hose & Belt Manufacturers Conference April 12, reflected on the past four recessions in the U.S., including the 1991 recession after the first Gulf War, the 2001 recession after the dot-com bubble, the Great Recession of 2008-09 and the start of the pandemic in 2020.

The pandemic's recession was deeper than any other, he said, noting it also was the shortest.

"As we write the history of 2020, the actual period of recession was about three months. Believe it or not, the economy started rolling again in June of 2020," he said. While the economy rapidly plummeted in March 2020, it bounced back just as quickly.

"We went into 2020 with an economy growing at 2.25 percent," he said.

In November 2019, in a previous keynote, Tutterow had said the economy was predicted to drop to a 1.9-percent growth rate for 2020, acknowledging two risks: potential for increased trade war with China, and a then-unknown virus in Wuhan that could "hop the pond" and turn into a global pandemic.

"The first did not happen. The latter did," Tutterow said, referencing the COVID-19 pandemic.

"We went from an economy growing at over 2 percent to one that contracted by 31 percent in the second quarter of 2020. We bounced back by 33 percent in the third quarter, we added another 4.5 (percent) in the fourth quarter, we finished up 2020 down 3.5 percent."

In 2021, he said, the consensus outlook for GDP growth was anticipated at 7.5-8 percent.

"We said 6.2 (percent)," said Tutterow, who serves as the director of the Econometric Center at KSU's Coles College of Business. He said the GDP finished 2021 up 5.6 percent.

Looking forward in 2022, he said the consensus outlook is that the GDP will be up 4-4.5 percent.

But between inventory levels in the fourth quarter of last year as well as Russia's attack on Ukraine and the resulting hike in oil prices, Tutterow said the economy is, instead, likely to see 2.7- to 2.8-percent GDP growth in 2022.

He said the economy is "gradually moving back toward normalcy," noting the de-acceleration of growth "feels problematic" following the pandemic's rebound.

Scott Brown, retired senior vice president and chief economist with Raymond James Financial Services Inc., had a similar outlook, claiming the current financial system is in "pretty good shape" with consumer spending up and unemployment low.

He pointed to GDP growth in his State of the Economy presentation May 3 during the Rubber Roller Conference in Tampa, Fla., noting that while there was a drop in the first quarter of 2022, "the meat and potatoes are really strong" as consumer spending, which makes up about 70 percent of the economy, is up.

The clincher, he said, is that imports are up as well, which appear to subtract from GDP growth.

"We're seeing a lot more imports … because we can't really meet the demands the U.S. economy is facing right now," he said. But those dollars come back.

"When you import from the rest of the world, those dollars that we send overseas don't just sit there," he said, adding that they typically come back in the form of buying financial assets.

And while the U.S. is experiencing a tight labor market, unemployment is low, according to Brown.

"The job growth has been extraordinarily strong over the last year," he said.

"We're about to get back to where we were before the start of the pandemic," he added, noting unemployment in March was down to 3.6 percent.

The number of weekly unemployment claims is the lowest it's been since the 1960s with double the labor market, he said. At the start of last year, weekly claims were up to about 800,000. As of early May, it was down to 200,000.

The economy is in a state of growth, but there is some pushback of which we should be weary.

Consumer confidence is fading in the face of inflation, and this doesn't bode well for a bustling economy, Tutterow said.

Consumer sentiment hit a 28-year low in the Great Recession of 2008, "and then we came back up," he said. "We were doing extremely well between 2016 and 2019."

Then sentiment plummeted when the pandemic hit, but it didn't reach the levels seen during the Great Recession. And while sentiment returned to what Tutterow called a "normal range" by the early months of 2021, it has fallen and continues to fall now.

Consumer confidence, he continued, began fading in the summer and fall of last year, right up to now, "because of inflationary pressures."

As inflation increases, consumer sentiment drops, he said, pointing to the rise in energy prices, for example.

"Energy prices, the price of gasoline at the pump, exerts a disproportionate pressure on consumer cycles."

To keep the economy in good shape, "we need to see this consumer sentiment come back up," he added.

As for the labor market, while it's great that people are finding jobs, Brown said, the current growth in employment is a sign of an unsustainable pace in the economy.

"By and large, this is a very, very tight job market," Brown said. And every time the unemployment rate goes down, a recession follows, he added.

"I think this is probably the physical limit as to how low we can go," he said, in reference to the 3.6 percent unemployment rate, which still stands today, according to the latest May 2022 update from the Bureau of Labor Statistics and the U.S. Department of Labor.

But as people leave their jobs for higher paying opportunities, it adds inflationary pressure, he said, nodding to the ongoing Great Resignation. And with inflationary pressure, the Federal Reserve steps in to cool it.

"It's not that the unemployment rate causes recession, it's because the (Federal Reserve is) worried about the economy being too hot, too tight, labor market too strong, and that's leading to inflationary pressure," he said.

In a tight labor pool, wages increase, and this adds to the pressure, Brown said, which already includes issues like the rebound of prices after they were depressed during the lockdowns in 2020 and supply chain difficulties driving up demand.

"The Federal Reserve can't do anything about supply, but they can do something about demand," Brown said. "They can tighten credit, they can raise interest rates to slow the economy down."

Like Wood, Brown said the question becomes how much and how fast.

"An economic expansion never dies of old age," Brown said. "It's the Fed that murders it, and that's where we're heading."