Everywhere you go, you hear people talking about the economy. People complain about the THE ECONOMY/the economy and sometimes they don’t know the facts because economics is complicated and it is organic - always changing. In addition, sometimes it’s easier to just blame THE ECONOMY for the woes of how we feel ‘it ought to work’, usually by pointing out how cheap gasoline was in 1974 rather than exploring how prices change over time and through situations.
For the purposes of this essay, when ‘economy’ is in lower case letters, I’m referring to the person / family level economy: cost of housing, cost of groceries, cost of gasoline, how high sales taxes impact buyers, cost of healthcare, cost of education, cost of going out to eat, remnants of the COVID-19 era pandemic, etc. When I reference THE ECONOMY in all caps, it’s to discuss the overall ECONOMY of the USA: GDP, inflation, recession, the stock market’s influence, worker productivity, employment / unemployment statistics, remnants of the COVID-19 era pandemic. The USA ECONOMY is currently healthy, so why are prices so high and why does it feel the economy is off? This blog essay is longer than most I write because this topic is not a simple one. Thank you for hanging in!
I’m not an economist; I am a researcher for facts so I can be well informed. It seems the individual / family economy is on the minds of many people right now. THE USA ECONOMY is currently quite healthy. One article from National Public Radio asserts, “Many experts feared a recession. Instead, [THE ECONOMY] has continued to soar,” (https://www.npr.org/2024/01/25/1226811891/), and the article discusses how [THE U.S. ECONOMY] grew substantially faster at the last quarter 2023 through the first half of 2024, defying forecasts of a likely recession and points out the reasons why. ”The U.S. economy continues to defy expectations. The nation's gross domestic product — the broadest measure of economic activity — grew at an annual pace of 3.3% in October, November, and December [2023], according to a report Thursday [January 2024] from the Commerce Department. [Gross Domestic Product - GDP - “…measures the value of the final goods and services produced in the USA” (https://www.bea.gov/data/gdp/gross-domestic-product). More on GDP later in the essay.]
That was substantially faster than forecasters had expected. It was a fitting end to a year of robust economic growth, defying projections that rising interest rates would tip the economy into recession.
Here are five things to know about [THE ECONOMY]:
* Consumers lead the way
Consumer spending is the biggest driver of the U.S. economy, and Americans kept their foot on the gas — eating out in restaurants, buying sporting goods, and paying for travel.
Personal spending grew at an annual pace of 1.9% in the fourth quarter, only a modest slowdown from the three months before. That was fueled by a better-than-expected labor market, with solid job growth and rising wages. ‘Consumers are hanging tough,’ said Mark Zandi, chief economist of Moody's Analytics. ‘They're spending just enough to keep the economy moving forward but not so much that it would fan inflationary pressures.’
* Firing on all cylinders
Other parts of the economy are also holding up well.
Government spending, business investment and exports all rose in the fourth quarter. Even the housing sector, which has been battered by mortgage rates that neared 8% in October [2023], was not the drag on the economy that one would typically expect.
‘Housing usually in a high-rate environment gets crushed,’ Zandi said. ‘It's the thing that drives the economy into the ground. And that just didn't happen this time around.’ Instead, new home construction helped make a small positive contribution to GDP.
* A head scratcher on interest rates
All the positive news was particularly striking given how much the Fed has raised interest rates in an effort to curb inflation.
Economists feared that the central bank's aggressive actions would trigger an economic downturn, as has usually been the case in the past. Instead, the economy ended last year [2023] 3.1% larger than it was 12 months earlier, raising hopes for a ‘soft landing,’ in which inflation is tamed without a sharp jump in unemployment. The unemployment rate has remained under 4% for nearly two years, while wages are now growing faster than prices and the stock market is hitting record highs.
‘Not only was it not a bad year,’ Zandi said. ‘It was a really good year.’
* Inflation is easing
Even though the economy is growing at a rapid clip, it shows no sign of overheating. Price indexes in the GDP report show inflation continued to ease, with core prices rising at an annual rate of just 2% over the last six months. That should be reassuring to the Fed, which is widely expected to begin cutting interest rates later this year. ‘Despite the stronger-than-expected GDP growth rate in the fourth quarter, we view today's data as Fed friendly,' said chief economist Jay Bryson of Wells Fargo Economics. Bryson expects the central bank to begin lowering rates in May [2024], but adds that an earlier rate cut in March is not out of the question.
* But there are potential setbacks
As encouraging as the GDP report is, there are always potential storm clouds on the horizon. Zandi puts geopolitical risks at the top of that list, with the possibility that Middle East tensions trigger a spike in oil prices. ‘That would be a mess,’ Zandi said. ‘Right now we're paying close to $3 for a gallon of unleaded [gasoline] which is really good. But if we're at $3.50 or $4, that undermines confidence. It undermines purchasing power.’ These 5 charts show how life got pricier, but also cheaper, in 2023
So far, forecasters have been pleasantly surprised that the economy has avoided such pitfalls, and Zandi is optimistic that the encouraging trends will continue. [To see the charts, open this link: https://www.npr.org/2023/12/27/1221254088/5-charts-inflation-prices-cheaper-pricier-2023.]
‘The risks are not just one-sized,’ Zandi said. ‘A year ago [2022], it felt like they were all to the downside. Now you think there could be some upside as well, and you saw that in 2023.’” (qtd. in https://www.npr.org/2024/01/25/1226811891/economy-gdp-recession-growth-interest-rates-inflation-federal-reserve).
See what I mean about THE ECONOMY/the economy being complicated and it’s also whimsical, changeable, temperamental. The battle between Russia and the Ukraine, and between Israel and Hamas, and the historically tenuous relationships with Middle Eastern oil-producing countries with thee USA all contribute to higher prices. We are not a separate ECONOMY from the world’s ECONOMY and that affects all of us…the economy. And the fact that there is a seriously glaring gender data gap means the GDP is an incomplete picture of ECONOMIC/economic activity.
In economics reporter, Trina Paul’s August 2023 article, ”Why is inflation so high? An economist explains why everyday essentials cost more”, she explains, “As prices continue to increase across a broad range of spending categories, many Americans are finding that their paychecks aren’t going as far as they used to. That’s probably because in June, the year-over-year inflation rate, as measured by the Consumer Price Index [“The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.
The CPI is one of the most popular measures of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI), which measures changes in the prices received by U.S. producers of goods and services” (https://www.investopedia.com/terms/c/consumerpriceindex.asp)] , was a whopping 9.1%, the highest it’s been in over four decades.
So, what’s given rise to higher prices at the gas pump and or at your local grocery store? Well, there are a variety of different causes — from international conflict to changes in what consumers purchase.
Select spoke with Michael Gapen, head of U.S. economics research at Bank of America, about some of the reasons behind the record-high inflation rates.
First off, let’s establish some basics about inflation, which is the increase in the price of goods and services over a period of time. In order to measure inflation, economists use a price index to look at price changes across a number of different goods and services.
Though there are many different indices, the Consumer Price Index for All Urban Consumers, or CPI-U, is one of the most popular, measuring price changes within a theoretical basket of goods and services for urban consumers, including food, apparel and automobiles, among other categories.
The Federal Reserve uses a different price index to measure inflation — the Personal Consumption Expenditures, or PCE Index — which similarly measures price changes among goods and services.
Lastly, the core inflation rate refers to an index that excludes volatile spending categories such as food and energy, and can be a useful index for economists since food and energy prices can fluctuate significantly.
* There are multiple causes of inflation
The current high inflation rate can be attributed to many different factors, many of which are a result of the Covid-19 pandemic.
Gapen pins rising prices on three general causes — increases in household demand and supply-chain shortages due to the pandemic, the war in Ukraine and the presence of a strong labor market.
Generally, the story goes something like this: At the start of the pandemic, consumers began spending less because of lockdowns, and in turn, started saving more. Then, when Covid-19 restrictions eased, people started spending more again. Companies, however, couldn’t keep up with this increased consumer demand — many of them had reduced production because of the pandemic and experienced shipping delays as well as shortages in labor and key inputs.
The result of all these things? Higher prices for most goods and services. While price increases were seen across multiple categories in June [2023], some of the largest price hikes occurred in gasoline, shelter, and food — the year-over-year increase in food prices was 10.4%, while for shelter it was 5.6% and for energy prices, 41.6%. Shelter, food, and energy are also the major categories that make up the Consumer Price Index, accounting for nearly 54% of the entire index. Though energy commodities such as gasoline and services such as electricity are not weighted heavily in the Consumer Price Index, energy prices have also risen significantly, with gas prices increasing 60% year-over-year.
Just as there are many causes of broad-based inflation, there are many factors that have given way to higher energy prices as well. Perhaps most notably is Russia’s invasion of Ukraine and Western countries’ resulting sanctions which put severe limits on the import of Russian oil. Both events played a significant role in rising energy prices and supply-chain issues, as has fluctuating consumer demand for gasoline.
In the meantime, consumers looking to save money at the pump should opt for a credit card that offers increased rewards when you pay for gas. Gapen also notes that the shift away from spending on goods and toward services has affected inflation. While consumers purchased more goods during the pandemic since they were stuck at home, many are now spending more on services, such as travel and concerts, than they had been.
In fact, services prices comprise a large percentage of the Consumer Price Index — nearly 57% — including big expenses such as shelter as well as smaller ones such as car rentals.
‘A lot of service prices fell as consumers weren’t traveling on airlines and going to hotels. In the past 12 months, many of those prices have rebounded,’ says Gapen. ‘The unemployment rate is 3.6%. There’s a high demand for labor and strong wage gains. Labor is the number one input for services production. In general, it’s about half of any cost of production on the service job.’ In other words, a tight labor market has led to increased labor costs, which have in turn increased the cost of services that consumers pay for.
* Bottom line
There are many different factors affecting inflation, ranging from geopolitical conflict and changed consumer behaviors due to the ongoing Covid-19 pandemic. Some of the categories with the largest price increases — shelter, energy and food — also make up most of the Consumer Price Index, which all points to consumers having to spend more than usual on many of their everyday expenses” (qtd. in https://www.cnbc.com/select/why-is-inflation-so-high/#:~:text=The current high inflation rate can be attributed,and the presence of a strong labor market).
When thinking about THE ECONOMY, some common terms are worth revisiting:
1. Gross Domestic Product (GDP): “A comprehensive measure of U.S. economic activity. GDP measures the value of the final goods and services produced in the United States (without double counting the intermediate goods and services used up to produce them). Changes in GDP are the most popular indicator of the nation's overall economic health…The value of the final goods and services produced in the United States is the gross domestic product. The percentage that GDP grew (or shrank) from one period to another is an important way for Americans to gauge how their economy is doing. The United States' GDP is also watched around the world as an economic barometer.
GDP is the signature piece of BEA's [Bureau of Economic Analysis] National Income and Product Accounts, which measure the value and makeup of the nation's output, the types of income generated, and how that income is used. BEA also estimates GDP for states, metropolitan areas, counties, and U.S. territories. We publish GDP by industry, as well…What can you do with GDP numbers? Answer questions like:
* How fast is the U.S. economy growing?
* How does my state's economy stack up against others?
* Which industries are growing? Which are slowing?
The White House and Congress use GDP numbers to plan spending and tax policy. The Federal Reserve uses them when setting monetary policy. State and local governments rely on GDP numbers, too. Business people use these stats when making decisions about jobs, expansion, investments, and more.
BEA estimates the nation's GDP for each year and each quarter. But new GDP statistics are released every month. Why? Because for each quarter, BEA estimates GDP three times. The advance estimate, coming about a month after the quarter's end, is an early look based on the best information available at that time. The second estimate and third estimate each incorporate additional source data that weren't available the month before, improving accuracy” (https://www.bea.gov/resources/learning-center/what-to-know-gdp).
What is missing from the GDP calculations represents a huge gender data gap: the billions of $ in unpaid service, provided mostly by women for childcare / driving kids to and from school /activities,/ doctors’ appointments, care of the elderly family members, household duties such as grocery shopping / cooking /cleaning, childcare, etc. This unpaid work is often in addition to a person’s, usually women's, working outside the home.
2. Supply & Demand: “The law of supply and demand is a fundamental concept of economics and a theory popularized by Adam Smith in 1776. The principles of supply and demand are effective in predicting market behavior. Whether an individual is a manufacturer or a consumer, the supply and demand equilibrium is relevant in daily market transactions.
* KEY TAKEAWAYS
The law of supply and demand was popularized by Adam Smith in 1776.
Consumer demand for a good commonly decreases as its price rises.
As prices of a good increase, producers manufacture more to realize more profits.
* Consumer Demand
Consumer demand for a good commonly decreases as its price rises. If televisions were priced at $5 each, then consumers would purchase them and probably buy more TVs than they need based on price. The demand will remain high. If the price is $50,000, this good would likely be considered a luxury good, and demand would be low.
Demand is the quantity of a good that consumers are willing and able to purchase at various prices at a given time.
This example assumes that product differentiation does not exist. There is only one type of product sold at a single price to every consumer. In this closed scenario, the item is not an essential human necessity such as food or shelter, does not have a substitute, and consumers expect prices to remain stable.
* Explaining Supply
The supply curve considers the relationship between the price and available supply of an item from the producer's perspective rather than the consumer's.
When prices of a product increase, producers are willing to manufacture more of the product to realize greater profits. Falling prices depress production as producers may not recover input costs. If the costs to produce a TV are $50, production would be unprofitable when the selling price of the TV falls below $50.
If television prices are $1,000, manufacturers will focus on producing television sets over ventures and provide incentives to build more TVs. The behavior to seek maximum profits forces the supply curve to be upward-sloping.
An underlying assumption of the theory lies in the producer taking on the role of a price taker. Rather than dictating the prices of the product, this input is determined by the market, and suppliers only face the decision of how much to produce, given the market price. Optimal scenarios are not always the case, such as in monopolistic markets. [“A monopoly is a market structure with a single seller or producer that assumes a dominant position in an industry or a sector. Monopolies are discouraged in free-market economies because they stifle competition, limit consumer substitutes, and thus, limit consumer choice. In the United States, antitrust legislation is in place to restrict monopolies, ensuring that one business cannot control a market and use that control to exploit its customers” (https://www.investopedia.com/terms/m/monopoly.asp).]
* Finding Equilibrium
Consumers typically look for the lowest cost, and producers test their products at the highest price. When prices become unreasonable, consumers change their preferences and move away from the product.
A proper balance must be achieved where both parties engage in ongoing business transactions to benefit consumers and producers. In supply and demand theory, the optimal price that results in producers and consumers achieving the maximum combined utility occurs where the supply and demand lines intersect” (https://www.investopedia.com/articles/economics/11/intro-supply-demand.asp).
3. Elasticity: Dr. Jodi Beggs, Business Economics professor at Harvard University, says of elasticity in the economy,”…is a term used a lot in economics to describe the way one thing changes in a given environment in response to another variable that has a changed value. For example, the quantity of a specific product sold each month changes in response to the manufacturer alters the product's price.
A more abstract way of putting it that means pretty much the same thing is that elasticity measures the responsiveness (or you could also say ‘the sensitivity’) of one variable in a given environment -- again, consider the monthly sales of a patented pharmaceutical -- to a change in another variable, which in this instance is a change in price. Often, economists speak of a demand curve, where the relationship between price and demand varies depending upon how much or how little one of the two variables is changed.
* Why the Concept is Meaningful
Consider another world, not the one we live in, where the relationship between price and demand is always a fixed ratio. The ratio could be anything but suppose for a moment that you have a product that sells X units every month at a price of Y. In this alternative world whenever you double the price (2Y), sales fall by half (X/2) and whenever you halve the price (Y/2), sales double (2X).
In such a world, there'd be no necessity for the concept of elasticity because the relationship between price and quantity is a permanently fixed ratio. While in the real world economists and others deal with demand curves, here if you expressed it as a simple graph you'd just have a straight line going upward to the right at a 45-degree angle. Double the price, half the demand; increase it by a quarter and the demand diminishes at the same rate.
As we know, however, that world is not our world. Let's take a look at a specific instance that demonstrates this and illustrates why the concept of elasticity is meaningful and sometimes vital.
* Some Examples of Elasticity and Inelasticity
It's not surprising when a manufacturer substantially increases a product's price, that consumer demand should diminish. Many common items, such as aspirin, are widely available from any number of sources. In such cases, the product's maker raises the price at its own risk -- if the price rises even a little, some shoppers might stay loyal to the specific brand -- at one time, Bayer nearly had a lock on the U.S. aspirin market -- but many more consumers would probably seek the same product from another manufacturer at the lower price. In such instances, the demand for the product is highly elastic and such instances economists note a high sensitivity of demand.
But in other instances, the demand is not elastic at all. Water, for example, is usually supplied in any given municipality by a single quasi-governmental organization, often along with electricity. When something consumers use daily, such as electricity or water, has a single source, the demand for the product may continue even as the price rises -- basically, because the consumer has no alternative.
* Interesting 21st Century Complications
Another strange phenomenon in price/demand elasticity in the 21st century has to do with the Internet. The New York Times has noted, for instance, that Amazon often changes prices in ways that are not directly responsive to demand, but rather to the ways consumers order the product -- a product that cost X when initially ordered may be filled at X-plus when reordered, often when the consumer has initiated automatic re-ordering. The actual demand, presumably, hasn't changed, but the price has. Airlines and other travel sites commonly change the price of a product based on an algorithmic estimation of some future demand, not a demand that actually exists when the price is changed. Some travel sites, USA Today and others have noted, put a cookie on the consumer's computer when the consumer first inquires about the cost of a product; when the consumer checks again, the cookie raises the price, not in response to a general demand for the product, but in response to a single consumer's expression of interest.
These situations do not at all invalidate the principle of price elasticity of demand. If anything, they confirm it, but in interesting and complicated ways.
* In summary:
- Price/demand elasticity for common products is generally high.
- Price/demand elasticity where the good has only a single source or a very limited number of sources is typically low.
- External situations may create rapid changes in the price elasticity of demand for almost any product with low elasticity.
Digital capabilities, such as ‘demand pricing’ on the Internet, can affect price/demand in ways that were unknown in the 20th century” ( https://www.thoughtco.com/beginners-guide-to-price-elasticity-of-demand-1146252) .
Is your head spinning? Thinking seriously about THE ECONOMY and the economy will do that! Still, if we are to think critically and factually about THE ECONOMY and how it affects the economy, knowing how to just the numbers is important. And, if you are tempted to blame a political party for THE ECONOMY, then it would be problematic because there are so many moving parts to THE ECONOMY. Still, if you look at the current ECONOMY, it looks good…even if the economy may not.
Here are a few articles worth exploring on if ‘price gouging’ is to blame because corporations may be attempting to ‘make up’ for the COVID-19 pandemic profit losses:
Was this helpful to you? What do you think about THE ECONOMY/the economy? Please share your thoughts, insights, and suggestions by either commenting below this post if you are reading this on social media, or, if you are reading this through your email subscription, please share, by emailing me, at reimaginelife22@gmail.com.
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