The International Monetary Fund pared down its estimates of how the US economy will be doing, even after a “strong recovery” and “positive effects of unprecedented policy stimulus, combined with the advantages of a highly flexible economy.”
“Just over two years after the COVID-19 shock, the unemployment rate and other measures of labor force underutilization have returned to end-2019 levels and output is close to its pre-pandemic trend,” the organization wrote. “Rapid wage increases for lower income workers have reduced income polarization, poverty fell to 9.1 percent in 2020 (from 11.8 percent in 2019), and there were even larger reductions in poverty for female-headed households, children, African Americans and Hispanics.”
But that was then, this is now. Or, in short: less growth, more unemployment. Even with the reappearance of many jobs—the IMF called it job creation, but recovery is probably more accurate on the whole—labor force participation is still off, “reflecting a secular, demographic downtrend and early retirements.” That furthers what was the already ongoing problem of too few people available to take open jobs.
Then, the effects of school closures and remote learning, which could affect education in the longer term and then productivity if students have trouble making up for lost opportunities, is an issue.
Corporations have been fairly resilient due to “increased cash buffers, a lengthening of debt duration, and generally healthy interest coverage ratios.” But separate from the IMF report, it’s important to also remember the amount of federal government and Federal Reserve assistance that came into play. A lot of money was pumped into the economy, both to consumers and directly to corporations. That flow of cash is no longer available.
Supply chain issues, while having shown some recent signs of improvement, still take a toll on the economy. So is inflation that has become broad and persistent, not something explained away as transient effects of energy and food prices.
It’s left to the government, which means the Federal Reserve in this case, to slow price and wage growth while trying to steer clear of a recession. That will mean higher interest rates, with the Fed’s baseline number probably rising to touch 4%. Currently, the top of the target range is 1.75%. A year ago, it was 0.25%.
“Based on the median projection for the policy rate published at the June FOMC meeting, we expect the U.S. economy will slow in 2022-23 but narrowly avoid a recession,” the IMF wrote back at the end of June, expecting GDP growth of 2.3% by year’s end, down from the previously projected 2.9%. Given current data and expectations, that seems overly optimistic.