OPINION:
The economy will dodge a recession, but it won’t be a soft landing — a steady growth path with inflation at about 2%.
Prices are up 20% since President Biden took office, and wages have not kept pace.
Households kept spending by tapping savings accumulated from COVID support checks. Consumers borrowed more as those ran out, but now they must trim their sails.
First-quarter gross domestic product growth slowed to 1.3%, but that exaggerated the slowdown in demand. Goods producers ran down inventories, and a strong dollar plus Chinese subsidies increased imports. U.S. producers running down their stocks and domestic consumers satisfying their needs with more foreign products subtract from GDP.
Inventory investments fluctuate no matter the state of the economy, and poor first-quarter performance should prove temporary.
Mr. Biden’s tariffs on Chinese imports — electric vehicles, batteries, solar panels, steel and aluminum — mostly hit goods we aren’t yet importing from China, products where China has so much excess capacity that it will manage to export anyway and items where other foreign sources could fill most voids. Still, another sharp jump in imports is unlikely.
Business investment remains robust thanks to artificial intelligence. And many of Mr. Biden’s infrastructure and industrial policy investments are picking up — many in Republican congressional districts.
That’s tempered by local governments running out of COVID money to boost their largest budget item after public welfare — public schools. And states are looking to purge Medicaid rolls, which expanded as the pandemic took hold.
In 2023, a surge in immigration boosted growth.
Additions to the labor force from maturing young people born here and legal immigration less retirements should have permitted employment growth of about 100,000 a month. Instead, it was 250,000.
Somehow, illegal immigrants are managing to find work and adding to pressures on housing in places where space is tight, such as New York.
The forecasting services I monitor most closely are Wells Fargo and Action Economics. Those are consistent with my thinking that the economy is returning to a growth path of at least 2%.
Immigrants are likely dampening wage pressures, but we are not done with inflation.
Shortages abound in key areas where businesses need workers. For example, competition is intense for new hires to build out artificial intelligence.
Over the last 12 months, even with home construction flagging, wages are up in that sector 8.3%, compared with 4.0% for the overall private economy.
Wages at automobile repair shops are up 8.9% and dry cleaners and laundries by 5.9%.
Mr. Biden says he wants to resurrect Trump-era controls at the border, but his success remains to be seen. Some failure could ease pressures in construction and many service activities.
Overall, headline inflation in May was 3.3% and prices less food and energy were 3.4% — down from peaks of 9.1% and 6.6% in 2022. Most of the progress has been in goods, not services.
In a reelection ploy, President Biden recently released 1 million barrels from the Strategic Petroleum Reserve — an abuse of the intended purpose of the national stockpile that he can’t keep repeating after the election.
Overall, a strong dollar and moderating import prices helped put a lid on goods prices. Year-over-year, imported goods prices, excluding fuels and food, were up only 0.1%, and consumer prices for goods less energy and food were down 1.7%.
When the Federal Reserve lowers interest rates, dollar-denominated debt won’t be as attractive to foreign investors, nor will U.S. equities and real estate. That will weaken the dollar and raise import prices.
With wages rising in the goods sector 4.9% annually, domestic manufacturers can’t keep taking price cuts — they will limit supply and push consumers into imported goods whose prices will rise too.
In the services sector, rents and the imputed rent on owner-occupied homes are 36% of the consumer price index and 45% of the core CPI. Those are rising at a 5.4% annual pace. Other services are 25% of the CPI and increasing at a 5.2% rate.
Apartment rents are accelerating up, and new home construction has fallen to COVID shutdown levels.
Along with rising labor costs and shortages of buildable land near major cities, Mr. Biden’s new energy regulations add $31,000 to the cost of building a new home.
Home prices, as tracked by the S&P CoreLogic Case-Shiller Index, even with high mortgage rates, are rising at 7.2% a year.
Economists lean on expectations a lot. The household surveys conducted by the Conference Board, New York Federal Reserve and University of Michigan put those at 3% to 4%.
If Mr. Biden is not successful in curbing immigration, more workers could lift growth closer to 3%.
It’s a bumpy landing — we will get to steady sustainable growth of 2% to 3%, but inflation will continue. We may occasionally get monthly prints close to 2%, but don’t count on the beast becoming tame.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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