Communications

In a recent New York Times article, Jeanna Smialek surveys the present economic landscape and reviews a) the major arguments supporting a return to a pre-pandemic normal and b) the major arguments supporting a new normal virtually impossible to anticipate amid the torrent of demand and supply shocks presently at work on the U.S. economy.

Those commentators and economists tilting toward an eventual return to the pre-pandemic normal point to the following considerations in support of their position:

• The great surge in consumer demand from pent-up savings and its impact on inflation will begin to subside as consumers deplete their cash savings.
• Federal relief payments have essentially ended, which will translate to less spending power and less pressure on price increases.
• Labor shortages, which require employers to pay more for a reliable work force and encourage them to set higher prices to cover increased costs, will abate as more workers return to the work force in the wake of further success against the pandemic.
• The Federal Reserve's recent decision to raise interest rates by 25 basis points will dampen inflationary pressures and expectations.
• The supply chain bottlenecks will eventually diminish, adding much needed supply to satisfy consumer demand and stabilize prices.

At the other end of the spectrum are commentators and economists who question the validity of each of the considerations favoring a return to a pre-pandemic normal.

• Consumer demand remains robust and, given inflationary expectations on the part of the consumer, will continue to remain so. Further, the spending impact from federal relief payments continues, given available evidence.
• The Federal Reserve's recent interest rate increase was too little and too late to have any impact on inflation and inflationary expectations.
• Labor shortages are here to stay. The aging U.S. population and very low birth rates translates to more people leaving the workforce and fewer entering it, especially in view of a significant slowdown in immigration.
• Supply chain bottlenecks are far from resolved and remain a severe recurring problem since control of the pandemic remains a recurring problem.
• Heavy government spending, financed increasingly with debt rather than with tax revenues, adds to the overall demand in a world of stagnant, if not declining, supply with no end in sight for the supply bottlenecks.

And then there is the war in Ukraine and further shocks to the supply of oil, gas, coal, wheat, and sunflower seeds.

Perhaps the former head of the Bank of England, Mark Carney, put it best in a recent speech to the effect that "...the long-term era of low inflation, suppressed volatility, and easy financing conditions is ending...it is being replaced by more challenging macro-dynamics in which supply shocks are as important as demand shocks...the bigger story is actually the war..." which is reinforcing the process of de-globalization that is already underway.

No clear answers and no clear indicators to the path the U.S. economy will follow from this point forward. But uncertainty and anxiety will certainly be with us for some time to come.

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The U.S. economy can survive the recent oil price increases from supply side shocks, including supply side shocks triggered by the war in Ukraine, and avoid a recession, according to a recent commentary in The Economist.

The historical evidence points in the other direction, however. As one observer noted, there have been six occasions since 1970 in which a recession occurred following an increase in oil prices that exceeded their trend by more than 50%. As of February 2022, oil prices had already passed this 50% benchmark.

In addition, historical evidence suggests that the underlying forces driving up oil prices that lead to a recession may be either excess demand or supply limitations and not exclusively one or the other. The Suez crisis in 1956 and the OPEC embargo in 1972, each followed by a recession, were supply side events. Oil price increases which preceded the 2008 Great Recession were triggered by excess demand.

However, there are several reasons why the present supply side shocks to oil prices may be absorbed by the U.S. economy without setting off forces that result in a recession.

• Oil plays a much smaller role in each $1,000 of GDP today than it did 50 years ago at the time of the OPEC embargo. In 1972, one barrel of oil translated to $1,000 of GDP. Today, 0.43 barrels translate to $1,000 of GDP. The decrease reflects the shift in the economy from industry to services and the impact from far more efficient use of oil, e.g., today's mileage per gallon of gas is twice the average it was in 1972.
• The marginal, but important, decrease in travel and fuel usage as Zoom-like meetings and other lock-down practices gain favor at the expense of travel and face-to-face encounters.
• The reluctance on the part of central banks, such as the Federal Reserve, to take aggressive action to choke off inflation at the first sign of substantial oil price increases. Such reluctance is supported by recent studies that conclude the pass-through effects of oil price hikes on general inflation are quite minor. For example, the more efficient use of fuel today diminishes the impact of oil price increases.
• The rise of fracking and the transformation of the U.S. from a net oil importer less than two decades ago to a net oil exporter today for the first time since 1949.

Perhaps the Federal Reserve can remove massive oil price increases from center stage in assessing the reasons for the status and trends in consumer prices today. But the Federal Reserve's task remains no less daunting in attempting to shape the correct policy responses to dampen inflation and inflationary expectations without tipping the U.S. economy into recession. And it does so at a time when decades of globalization and its smoothing impact on consumer prices is subject to significant dismantling and further supply side shocks.

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In a review of selected anecdotes and studies about problem solving, The Economist notes that sitting at a desk in the office and staring at the ceiling falls outside the conventional definition of work but, rather, falls within the conventional definition of loafing. Loafing, as we all know, is non-productive. Therefore, the successful employee must be observed throughout the day in constant activity of a work-like nature, such as attending Zoom meetings, participating in conference calls, engaging face-to-face with the boss, sitting enraptured in front of a desktop monitor, or punching data into a spreadsheet.

But perhaps there is a role for the insensitive employee caught periodically staring at the ceiling while his or her desktop monitor long ago went to sleep. Such an employee may be carving out time to think, and his or her thought process during these periods of loafing may bear fruit. For example, a 2021 study concluded that difficult work-related problems triggered daydreaming by professional staff about potential solutions which resulted in more creativity. An earlier study found that people in general were more creative while taking a walk than they were sitting at their desks. If so, the problem solvers could withhold their dreaming until safely out of sight on a walk, thereby avoiding speculation about loafing on the job. Physical exercise as a reason for avoiding real work is usually easier to justify than staring at the ceiling in full view of other hard-working colleagues.

The trend toward remote work raises an interesting question. On the one hand, a less hectic work environment at remote locations should lead to more employee creativity and problem solving as employees are better able to find their quiet times to think. On the other hand, the absence of continuous observation by peers and superiors may lead to more true loafing where daydreaming is simply daydreaming. The outcomes will obviously vary by individual, but the greater opportunity to engage in unobserved thinking - either at a desk or on a walk - may emerge as the more frequent practice.

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Lissa Landy, a classroom and online instructor for 16 years with Shockproof! Training, passed away suddenly and quite unexpectedly in late February. All of us who worked with her over those years had the greatest respect, admiration, and affection for Lissa, who approached each teaching opportunity with a sense of great responsibility and dedication to the task at hand.

Since 2010, when Shockproof! Training began to emphasize live online webinars, Lissa conducted roughly 644 online single-topic webinars and individual sessions in various Credit College Courses. She reached more than 22,000 participants in those webinars and sessions. Although she focused primarily on Accounting Essentials, Credit Basics, and Commercial Business Underwriting, her favorite was always Accounting Essentials - the language of business and a very difficult topic to address and properly clarify. But she prevailed and was superb, as always, in her delivery, explanations, and clarifications drawing on her background and experience in commercial banking and public accounting.

We shall all miss her greatly.

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