Arizona State University economist Dennis Hoffman is fascinated by the weather. In a different life, he was an oceanographer focused on running simulation models to predict weather patterns or events. Instead, Hoffman’s reality is based on numbers, although forecasting has been a big part of his career. As an economist, Hoffman runs business cycle models to forecast economic conditions. So, what about the economic forecast? Is there a recession in Arizona?
“Storm clouds on the horizon, but it’s not entirely certain they’re coming our way,” Hoffman said sarcastically, in a studio space on the Tempe campus that can be used by television meteorologists.
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During the pandemic, there are many projections or estimates about the health of the economy. Now, the big question is: Are we in a recession? Or, where are we going? But who calls?
Not the media, not ordinary people, although there is no shortage of opinions. That job fell to the National Bureau of Economic Research, a nonpartisan, nonprofit research organization tasked with finding the most accurate economic reporting tools to make decisions.
Economists also use some of these tools, such as economic indices, on a daily basis to predict the health of the economy. Take the U.S. Bureau of Labor Statistics’ Consumer Price Index, which measures the average prices of consumer goods and services and how those prices have changed over time.
But there are also non-traditional indices like the Butter Popcorn Index or the Coupon Redemption Index, although Hoffman cautions that any index or economic indicator that correlates with consumer sentiment, while interesting, is generally not the best way to estimate consumer health. The exact method is economical, or if the “R” word is imminent. The index is a bit like a barometer. They provide an indication of changing pressure points, but are not necessarily perfect predictors of recessions.
With that in mind, ASU News asked Dennis Hoffman, director of the Office of Economists at ASU University, about the history of economic indices, why inflation seems to affect people differently, and whether the economy looks headed for a recession.
Question: What are economic indices and how do economists use them?
Reply: For centuries, businesses have tried to understand the state of the economy, or economic health, so they can plan, hire, and order products; so they can try to make sales. This practice got more complicated about 100 years ago, like after World War I, and especially in the (19)20s, when we had a postwar expansion; people started tracking the health of the economy. We came out of some pretty tough economic times: through the war, through the Spanish flu that hit the global economy hard. We got out of this in the (19)20s and people started to see this economic dynamism and they were trying to measure how fast it was growing, how long it was going and some of the warning signs that might be in the economy foreshadowing an impending recession.
The Purchasing Managers Index is a good index. This is a survey of sourcing manufacturers. These are the people who order inputs, products and produce basic components. These are the people on the front who give these orders. If they order more, they’ll see good times ahead, and we want to measure the increase in orders. They’ll be wary if their orders drop, maybe it’s a change in “barometric” pressure, signaling headwinds ahead, storm clouds ahead, or an impending recession. We also have the non-manufacturing PMI today to measure the service side of the economy. I prefer indices that tell me what businesses are buying. I think they’re much better than consumer confidence indices, which usually reflect the latest news they hear on cable news.
ask: What type of index should we be looking at in Arizona to measure the state’s economic health?
A: Do what we can to diversify our economy, Arizona is an attractive place. People are flocking to Arizona, and as a result, our real estate industry is very strong. In fact, many swingers in Arizona make a fortune investing and developing real estate in the state. Unfortunately, this is a cyclical business. Any kind of real estate index is very useful for predicting economic activity in Arizona, despite our very diverse industrial base today. As with Arizona’s housing cycle, so too is the health of the economy. We’ve seen a strong recovery in Arizona, and at the same time the state’s real estate has been strong over the past 12 months. The question is: what will our future look like?
ask: Are we in a recession?
A: Well, that’s the big debate among economists right now. Let me tell you what the recession hawks’ argument is based on. We’ve had unexpected inflation over the past 8 to 12 months, and it’s got Fed board members back on their feet, and they’re a little surprised. These people control the country’s monetary policy, and they try to keep prices stable while maintaining near-full employment. They’ve done both well in recent years, except last year. What they are doing is rapidly tightening money and credit, which will dampen demand for goods and services.
The last time we had a situation where the Fed stepped in and tightened money and credit quickly was in the early 80s and we had a moderate to severe recession in 1982. Pointing to this particular event, many economists say it is nearly impossible for the Fed to slow growth and keep inflation in check without triggering a recession.
If you say we won’t have a recession, you’re referring to the fact that consumers are incredibly healthy. Job creation is off the charts. We gained 500,000 new jobs and most of the month in the past 18 months. This is unprecedented. So in many ways and in many forms, we do have a very healthy economy, a solid balance sheet, a lot of pent-up savings, a lot of new jobs. That’s not necessarily a recipe for a recession.
So there are hawks on the one hand and hope on the other. If the underlying cause of inflation is a shortage of goods, then increasing supply by increasing production would be a better remedy, which would dampen demand through the Fed’s tightening cycle.
ask: If we enter a recession, what will be the influencing factors? More than one?
A: I think the causal factors of this particular event will be investigated for decades. Imagine a doctoral dissertation after a doctoral dissertation on this particular topic. There was actually an episode in the late ’40s that I thought should be looked into because I think it’s pretty similar. After World War II, people were relieved that we were coming out of dark times. The 1930s were a disaster. Add to that a war and people want to live, buy products, move on. But the supply chain was disrupted and we went through a bout of inflation. Our production was disrupted, like the past two quarters, GDP was down, but we continued to create a lot of jobs. So this is not defined as a period of decline, but rather a period of coercion.
People don’t like to hear that because we’re sick of COVID, we’re sick of pandemics, but it leaves an indelible mark on the economy. The shutdown of much of the U.S. economy and the world economy is unprecedented in history. Some of these shutdowns have been extended globally, especially in Asia. Reopening is always a challenge because after we closed, guess what? Unable to travel or consume services, people are sitting at home ordering products from online suppliers.
Initially, during the shutdown, manufacturers and good suppliers decided to slow down production, but were soon signaled to increase production. But they had to step up while Asia was still shut down. Today, cars cannot be built without semiconductors. You have a manufacturing facility built over the last 15 to 20 years with incredibly efficient, “just in time” inventory control, sourcing products from all over the world, and overnight, then we blow up the system. Now people are upset because they can’t buy anything. Of course, the federal government is worried about whether people have enough cash, so they dumped a lot of money (in the form of stimulus checks) in both the spring of 2020 and the spring of 2021, which both parties support. So you have a lot of money chasing shortages of goods, which is a cause of inflation.
Solution: Slow down demand and/or bring order back to the supply chain.
ask: Why does inflation seem to affect people differently?
A: The problem with recession, the problem with inflation is that it doesn’t hit everyone the same way. People who work from home, own their own vehicle, own their own home, have a stable job, no longer have to commute, have a steady paycheck, aren’t severely disrupted by the pandemic — they’re doing fine. By contrast, imagine individuals in Phoenix who work on the east side of the valley because that’s where the Phoenix Metro’s main job site is, but they live in the west valley because that’s where they can afford; they’re in West Valley pays rent and commutes around town. As a result, their rental costs have risen sharply. Gasoline prices are high. They had to spend too much money on a used car because their old used car was sold to them. These people are in a tough situation, even though the job demand for their services is fairly healthy. So, imagine a situation where we are in a recession. Let’s assume they have something to do with construction or real estate, and real estate is really slowing down; they might get fired. So now your rent is higher, your commute is more expensive, your car is more expensive and your job is at stake. This is a challenging situation. So you have a team that is thriving and a team that is not thriving.