Tatiana Bailey: Economic red flags and demographic headwinds could signal a coming recession | Content reserved for subscribers
Editor’s note: Tatiana Bailey is a director of the University of Colorado at the Colorado Springs Economic Forum. This is the second of two parts.
Last week, I talked about the record 11.3 million job openings in the United States, and I juxtaposed that with the 6 million unemployed. Doing some simple math, that leaves 5.3 million job vacancies with little or no prospect of being filled, mostly due to aging populations and declining fertility rates that began in the 1970s. , and which is catching up with us now.
And even if all of the employees who left the workforce during the pandemic returned, that would only add about 1.5 million workers, leaving about 4 million vacancies with no corps available to fill them. This ignores the lack of skills and the simple fact that we are not properly training people for the jobs of today.
In fact, in a March survey by the National Federation of Independent Businesses, half of responding employers said they couldn’t fill vacancies, while 92% of respondents said they couldn’t. unable to find qualified people for their vacancies.
I’ve always focused on labor because if companies can find the labor they need and workers can find jobs that match their skills with decent wages, pretty much everything in an economy can work. In fact, it can thrive on strong, globally competitive business growth, and strong, high-quality jobs. You have a virtuous circle of production and consumption.
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However, our current demographic headwind truly threatens this virtuous cycle, as jobs are the essential cog in the wheel. Demographic challenges are also a central theme where I worry about a recession in the next 12 months or so.
By itself, this headwind is likely to cause anemic long-term growth rates. But now we also have a plethora of factors that greatly increase the risk of two or more consecutive quarters of negative economic output, or gross domestic product, which is how a recession is technically defined.
Let’s take inventory.
In addition to the acute shortage of workers, we have experienced the highest and most widespread inflation in 40 years. Last week’s release of Consumer Price Index data from the US Bureau of Labor Statistics showed inflation in March rose 8.5% on an annual basis. The producer price index, which measures the inflation rate of producers or businesses, rose 11.2% year over year. The producer price index is generally a good predictor of future inflation, which is another reason I’m nervous about the economy. The latest US Census Bureau survey of small businesses for the seven-day period ending April 3 showed that nearly 45% of domestic suppliers are still experiencing delays, further reinforcing the notion of tight supply and price increase.
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Together, these factors have eroded business and consumer confidence to worrying levels (see charts 1 and 2). For businesses, profit margins are squeezed. For consumers, even with some of the highest wage increases in decades, inflation-adjusted wages are down 2.7% year over year. This lack of confidence affects consumer decisions in what economists call demand destruction (see 3rd graph).
The COVID shutdown in parts of China, from where the United States imports much of its goods, is not helping the inflationary situation, nor is the horrible Ukrainian war. I don’t see the latter diminishing any time soon, as Russia continues to have a source of funding for this war, with many oil-dependent countries supplying Russia with over $1 billion a day.
The continuation of the Ukrainian war all but guarantees sustained food and energy inflation. In fact, a global slowdown is a worrying notion as I watch the headlines about “record inflation” in a growing number of developed and developing countries, particularly in staple foods and energy.
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To control inflation, the Federal Reserve could very well raise interest rates by half a percentage point in May and again in June. This always slows down economic growth – and often a little too much.
Inflation and interest rate hikes cause the dreaded inversion between short-term and long-term government securities yields, which generally must be sustained to accurately forecast a recession. At a minimum, however, any reversal signals doubt about future economic growth .
I recently participated in a monthly call with other economists and investors as part of a board appointed by the governor. At the end of the call, the governor’s chief economist asked everyone’s opinion on the likelihood of a recession.
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I would say that over 50% of the dripping economists in the room – myself included – said a recession is likely.
My two cents: when you have that many headwinds, the likelihood of one or more tipping us into a downturn is higher. Or, the mere interaction of these negative influences can create an aura of uncertainty for businesses and consumers that is enough to put the economy on hold.
In that case, I hope the meteorologists in Colorado in the spring are better than me when it comes to predictions.