United States Outlook

Median home prices in the United States have risen 30% in just the last two years. Combined with other asset appreciation, this has led to the sharpest surge in U.S. household wealth ever seen on paper – nearly $35 trillion in two years.

Due to the pandemic-driven government stimulus, net worth among the bottom 50% of earners in the United States has increased 90% over the last two years. Despite this surge, overall wealth inequality in the nation is still far too high.

The Federal Reserve engaged in $5 trillion in quantitative easing (injecting money into the economy) over two years, compared to $3.6 trillion in enacted over six years in the wake of the Great Recession.

First things first. The U.S. economy has fully recovered from the pandemic-driven recession.

This shouldn’t be news, as the economy has been recovered for almost a full year. Yet in many circles, including the White House 60% where the “Build Back Better” recovery plan is still being promoted, this fact doesn’t seem to be getting through. While the structure of the current economy is different than it was two years ago, a 3.6% unemployment rate, record low inventories, and the highest pace of industrial production ever is clear evidence that the U.S economy is operating at full capacity. This means the recession, defined as a period in which an economy produces significantly less than its potential, is over. In fact, the U.S. economy is running red hot. You can almost hear Scotty saying, “the engines can’t take any more of this, Captain!”

Still, despite clear evidentiary data to the contrary, pundits, politicians, and economists continue to behave as if the economy 30% is in recovery mode and, even more, that it is fragile and will derail quickly in the event of an even modest negative shock. This narrative sits at the heart of the crisis the United States is facing today both economically (the stimulus bubble we’re experiencing), and politically, as both parties become more and more driven by populism. From an economic standpoint the issue is simple: when you continue to “cure” a patient for an ailment they no longer have, eventually the cure becomes the ailment. There will be consequences for today’s policy choices.

Given current public discourse, it’s not surprising that the United States has a bad case of the jitters. Of late the stock market has 0% swooned even as consumer confidence has fallen to its lowest level since the economy was in the midst of the Great Recession well over a decade ago. Suddenly, there is chatter in the news about another recession (a double dip?) and the Wall Street Journal’s survey of economists suggests the chance of another downturn within the next 12 months is now at 30%. At issue is the surge in inflation and it’s believed impact on consumers, combined with rising interest rates, which have been driven up in part by the Fed’s moves to combat said inflation.

Beacon Economics does think there is a very high probability of a recession in the next few years (although not in 2022), but not because of current trends in prices and interest rates. A more accurate assertion would be that the Federal Reserve has already caused a recession, we just aren’t sure when it will start. Of course, the Fed received significant help from Congress and the White House in the form of excessive government stimulus deployed over the last two years – $12 trillion and counting to deal with a large but short-term pandemic shock. The result has been an overheated economy marked by an unsustainable level of spending and investment, as evidenced by supply chain issues, the growing trade deficit, asset market frothiness, and record low inventory levels. The inevitable collapse back to normality will create a recession in its wake.

The trillion-dollar questions are when a recession will likely begin and how bad will it be. Timing wise, certainly not yet. The main concerns about the economy right now—inflation and rising interest rates—are the symptoms of an overheated economy, not signs of an economy about to tip into a downturn. Although U.S. output contracted in the first quarter of the year, it wasn’t driven by weak spending—final demand in the nation grew at its fastest clip in three quarters, almost 3%.1 Rather, it was driven by the recent enormous surge in imports that replaced domestic production—another sign of an overheated economy.