The Economic Reality: Summary and Moving Forward The potential of recession and stagflation have been raised by some economists and market analysts. A recession is two consecutive quarters of negative economic growth. Stagflation appears when relatively high levels of inflation occur during a period of relatively low economic growth. The greatest threats to the U.S. economy that could cause either to occur are primarily derived from two sources: 1) Putin’s invasion of Ukraine, and 2) a resurgence of COVID, not just domestically, but internationally. These two sources are the primary threats that could cause future relatively high inflation in the United States, through energy prices and supply chain interruptions. Continued high inflation can erode purchasing power, which in turn lowers real spending and economic growth. Inflation has been the recent plague on the U.S. economy due to a combination of factors, primarily driven by supply chain disruptions, increased consumer demand, and a dramatic rise in energy prices. Labor market issues, a modest increase in wages, and record corporate profits have also contributed. Economic and job growth have been strong. Economic growth returned in the fourth quarter of 2020 and was a robust 5.7% in 2021. After peaking at 14.7% in April 2020, the unemployment rate approached its pre-pandemic low and hit 3.6% in March. Job growth returned in almost every month since April 2020, with total employment reaching nearly 151 million in March 2022 after bottoming out at 130 million in April 2020. Job openings were at record levels in 2021 and remain at near record levels in 2022. Inflation began an upward trek in early 2021 and reached an annualized inflation of almost 8.5% in March 2022, the highest level since the early 1980s. The impact of rising energy prices and supply chain issues are not just U.S. problems, they are global problems. Increasing energy costs have been driving global inflation. An annualized inflation rate of over 44% in energy contributed to the 7.5% annualized inflation rate in March for the European Union. In the U.S., for the 12 months ended March 2022, overall energy prices were up 32% with gas prices up 48%. According to the Bureau of Labor Statistics, the rise in gas prices accounted for almost a third of February’s increase in inflation and approximately half of March’s inflation. And that impact is understated, since rising gas prices affect shipping costs which in turn affect product costs. The World Bank has indicated that inflation is a problem globally, for both advanced economies and emerging markets. Initially the strong economic recovery (rising demand) and supply chain issues contributed to an increase in energy prices. Most recently, the rise in energy prices has been driven by Putin’s war against Ukraine. Russian energy is important to the global energy market, but the global energy market is also important to Russia. Russia is the world’s third largest oil producer behind the United States and Saudi Arabia. According to the International Energy Agency (IEA), Russia is the second largest exporter of crude oil with 60% of exports going to Europe and 20% going to China. Russia is also a major exporter of natural gas. According to Eurostat , Europe relies on net imports for approximately 83% of its natural gas. In 2020, Russia provided 23.0 % of natural gas imports, with Ukraine and Belarus providing 12.8% and 10.3% of natural gas imports, respectively. Putin’s invasion of Ukraine has created uncertainties in global energy supply that will likely remain for an extended period of time. These uncertainties affect pricing, which can have a continued and prolonged effect on inflation and in turn negatively impact global economic growth. In 2022, Putin’s invasion of Ukraine has dominated energy market pricing, with concerns and uncertainty over supply leading to a spike in the price of oil to over $108 per barrel, an increase in price of over 50% since December. In addition to Putin, another threat to inflation is any resurgence of COVID, not just domestically, but globally. COVID played a major role in disrupting global supply chains, which caused supply shortages and exacerbated infrastructure problems. COVID driven product shortages contributed significantly to inflationary pressures. Supply chain disruptions of imported goods affect the supply of finished goods available to consumers and inputs used by manufacturers. Any global resurgence of COVID would have a detrimental effect on supply chains, contribute to inflation, and negatively impact economic growth. And it’s a global world. Global supply chain disruptions would impact U.S. exports, imports, and goods produced for domestic consumption.
Central Wisconsin Report - Spring 2022
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