Rising unemployment, high inflation, rising interest rates and threats of austerity
San José, CA – On Friday, November 4, the U.S. Department of Labor reported that the unemployment rate in October rose from 3.7% from 3.5% in September. The increase was even larger for Asian Americans and Latinos, who saw their unemployment rates rise by 0.4%, twice the overall rise.
Recent announcements of job cuts means that unemployment will continue to rise. Technology firms are leading the layoffs, with Twitter cutting half their workers (3700 jobs), and Snapchat 20% (1300 jobs). In the post-pandemic period, exercise equipment company Peloton cut 32% of its workforce (1250 jobs) in two rounds of layoffs, and used car retailer Carvana cut 25% (2500 jobs).
A different picture was painted by the jobs report, which said there were 261,000 net new jobs created. While this is a solid gain, it is the lowest number since December of 2020, and is another sign of a slowing economy. The slowdown in job growth was broad based, with only accommodation (hotels) and local governments hiring more than this year’s average.
Part of this divergence between the unemployment rate and new job creation is that more and more people are having to work more than one job to make ends meet. Different government agencies estimate that between 5 and 15% of workers are doing this, which would mean more jobs but not more people with jobs.
One of the reasons for this is that over the last two years price increases have outpaced wage gains. In addition, the average number of hours worked has gone down. Between the two, the purchasing power of workers’ weekly earnings was down by more than 9% since the end of the last recession.
In response to high inflation, the Federal Reserve, the U.S. central bank, has been raising the interest rate at the fastest rate in 40 years. On Wednesday, November 2, the Fed raised the interest rate for the fourth time in 2022. The Federal Funds Rate that the Fed targets has gone from around zero in March to a bit over 3.8% this week, and more increases are coming. The Fed’s goal is to slow demand for goods and services, and thus bring down inflation.
One problem that will make this task more difficult is that big corporations have been increasing their prices when demand slacks off. For example, Campbell Soup, which has a bit more than half of the canned soup market, actually raised their prices when demand for Campbell Soup dropped off as restaurants reopened and people started eating out more as the pandemic eased.
The vast majority of economists think that the fall in demand from rising interest rates will lead to the start of a recession in 2023. Total domestic demand for goods and services made in the United States has been slowing over the last nine months, with the July to September 2022 period showing only a 0.1% growth. The last two quarters, or six months, have seen a fall in spending on business investment on new plant and equipment and new residential construction. A drop in this investment sector of GDP is typical of a period leading into a recession.
While most economists think that the recession will be relatively brief and mild like 1991 and 2001, they are assuming that a financial crisis will not break out. But in fact, there are growing strains the in financial system, especially in the market for U.S. government bonds that centers the financial sector. Aside from that, the Federal Reserve is not going to slash interest rates as they did in 1991, 2001, 2008 and 2020, because of continuing high inflation. The last time a recession happened when the Fed was raising interest rates, was the brutal 1981 recession where unemployment topped 10%, the highest rate since the Great Depression of the 1930s.
More Republicans in the Congress and Senate have been threatening to hold up the budget to force cuts in Social Security and Medicare. They are trying to blame today’s inflation on the large federal government budget deficit. In fact, during the 2022 Fiscal year the federal government budget deficit fell by more than half, from almost $3 trillion in 2020 and 2021 to $1.4 trillion. But inflation continued to rise to 8% or more for the last eight months, despite the drop in the budget deficit.
Of course, Social Security and Medicare did not cause the large budget deficits; the cause was spending to fight off the effects of the pandemic. In fact, the Republicans have long wished to reward Wall Street – both the investment funds as well as private health insurance companies – by cutting Social Security and Medicare. These programs are the most help to working-class Americans, who have to depend on their benefits in old age. But this austerity will just make the recession worse, not mention the health and standard of living of our seniors.