Job growth, moderating inflation spur hope amid recession fears

Positive economic news keeps rolling in, but despite finally moderating in July, high inflation continued offsetting wage gains and making things tough on consumers and companies.

There is a curious mix of conflicting economic indicators, most prominently the juxtaposition of declines in real gross domestic product with a strong labor market and low unemployment. Amid that, economic experts and business leaders are hopeful that the COVID-19 pandemic-disrupted economy remains on the mend, but worry about the risk of a recession that could cost people jobs and create even more pain than high prices.

“There’s a little light at the end of the tunnel we’re seeing from time to time. We’re seeing some lead times come down, we’re seeing some pricing come down,” said Chuck Dryer, territory manager for Industrial Tube and Steel Corp. in West Chester Twp.

“I think its still going to be a slow crawl for a while.”



The Dayton Daily News interviewed 15 local, state and national economic experts and business leaders, and analyzed 20 government economic datasets and reports to make sense of what is happening in the economy now and what people can expect going forward.

Robust jobs numbers, declining gas prices, low unemployment and increases in wages, industrial production, corporate profits and consumer sentiment are all trending in a positive direction.

Credit: Alexis Larsen

Credit: Alexis Larsen

But interest rates are up as the Federal Reserve tries to put the brakes on price growth. And fears of a looming recession are fueled by signs of the economy slowing, with housing starts dropping 9.6% in July, nonfarm business sector productivity declining 4.6% in the second quarter and two consecutive quarterly declines in the real GDP, government data show.

“I see cracks in the economy,” said Matt Sheridan, senior lecturer in finance at Ohio State University. “I don’t see earthquakes happening like we saw back in 2008. It doesn’t mean that the average consumer isn’t feeling the pain every single day.”

The experts didn’t agree on everything. But none ruled out the possibility that the Fed’s federal funds rate increases and tightened monetary policies would bring the much-desired “soft landing” — slowing the economy enough to tame inflation without causing a recession.

Credit: Contributed

Credit: Contributed

“We are in a strong economy,” said Bill LaFayette, owner of the Columbus-based firm, Regionomics, which studies community-level economies around the state.

“The demand for labor is very strong, which suggests that employers are not only needing people to work, it also means they are willing to stick their necks out to a certain extent to hire people rather than retrench because they worry that the economy is going to slow.”

Mixed signals

The global economic slowdown, massive job loss and health crisis started by the pandemic in the spring of 2020 was unprecedented, with economic effects still being felt in tangled supply chains, high prices and companies struggling to fill jobs.

“It’s crazy because everything kind of funnels through the employment issue. Supply chain issues come back to employment issues,” Dryer said. “At our mills right now their lead times are going out to next year and one of the big reasons is they don’t have the people to get the product done. So they’re always playing catch-up or always behind.”

Credit: Nick Graham

Credit: Nick Graham

Add in Russia’s invasion of Ukraine, which sent oil prices skyrocketing, and the Fed’s tightening of monetary policies and it’s not surprising that economic indicators are sending mixed signals 29 months into the pandemic.

Here are some of the key data points:

  • The Consumer Price Index, which measures average prices on a “basket” of consumer goods, increased 8.5 percent nationally in July compared to July 2021. That is down from June’s 9.1% annual increase, according to the U.S. Bureau of Labor Statistics.
  • There was no monthly CPI increase in July after a full year of monthly increases, three of which totaled more than 1%. In the Midwest region, which includes Ohio, the CPI declined 0.2% compared to June.
  • The Producer Price Index for final demand, which measures prices received by domestic producers of food, services and construction, increased 9.8% year over year in July, but declined 0.5% compared to June.
  • Real gross domestic product, which is the value of all goods and services produced in the U.S., decreased 0.9 percent in the second quarter, a preliminary number that will be updated, and 1.6 percent in first quarter, according to the U.S. Bureau of Economic Analysis.
  • Total nonfarm employment in the U.S. reached the pre-pandemic level for the first time in July, totaling 152.5 million jobs. The number of jobs increased by 528,000, led by leisure and hospitality, professional and business services, and healthcare.
  • Employment in Ohio and the Dayton Metropolitan Statistical Area had not recovered to pre-pandemic levels by June, with jobs totaling nearly 5.5 million and 384,200, respectively.
  • The U.S. unemployment rate dropped to 3.5% in July, the lowest since the pandemic started, and matched the 50-year record low of February 2020.
  • The Ohio unemployment rate in July was 3.9%, unchanged from June. In the Dayton metro area the rate was 4.2% in June, up from 3.2% in May, according to the BLS.

“This inflation is definitely harming people. It’s harming low- and moderate-income people who are struggling to pay for basic needs,” said Michael Shields, researcher at Policy Matters Ohio, a Columbus-based liberal-leaning think tank.

But he said a recession would be far worse because inflation simply redistributes income, while a recession is an actual reduction in economic output.

“And for people that means unemployment,” Shields said. “But it is also fewer goods and services being produced. A recession makes us poorer overall.”

He argues that companies are fueling inflation by keeping too much revenue as profit and that the government should battle inflation by adopting more progressive tax policies and giving workers more bargaining power.

Some of those interviewed contend the Fed was too slow to tighten monetary policies they believe contributed to inflation and that the federal government put too much money into the economy with three COVID-19 relief packages.

“Now the Federal Reserve and the Treasury and the Biden Administration are going to be out of bullets‚ because if they want to keep inflation under control they can’t go out and spend a whole bunch of money,” said Kevin Willardsen, associate professor of economics at Wright State University.

Credit: Contributed

Credit: Contributed

Others say the federal efforts helped people survive, saved jobs and fueled an economic recovery that went more quickly than anyone expected. Consumer spending soared, but the supply chain couldn’t meet demand, and prices began heading up last year.

Consumers are reacting to high prices by becoming more careful shoppers, Sheridan said.

“We are starting to see consumers trade down,” he said. “They’re being more flexible with brands. They’re willing to go to store brands. We’re seeing an increase in shoppers at Dollar Stores.”

Gas prices decline

Once prices go up, they rarely go back down, except during recessions or in the case of volatile commodities like oil and anomalies, such as used car prices that shot up as the semiconductor shortage cut production of new cars.

A 7.7% decline in gas prices and 4.6% reduction in overall energy costs drove improvements in both the consumer and producer price indexes in July, said Kurt Rankin, senior economist at PNC Financial Services Group.

Credit: Alexis Larsen

Credit: Alexis Larsen

“If that (energy) number continues to fall into August that’s going to continue to be a pressure release valve for inflation because as energy prices go that then flows through the rest of the supply chain, manufacturing processes, transportation and just feeds inflation down the line from there,” Rankin said. “So easing energy prices, easing oil prices will help inflation to slow throughout the rest of the year as well.”

In Ohio the average price of a gallon of regular gasoline reached a high of $5.065 on June 9, according to AAA. By Friday that gallon cost $3.685.

The price drop has people more willing to travel by car or airplane, despite some sticker shock over plane fares, said Kara Hitchens, public affairs manager Miami Valley AAA.

“I would say it’s going well. They are seeing some tight inventory in hotels and car rentals,” Hitchens said. “And people are making their budgets work, whether that means that they are cutting back somewhere else.”

Credit: Contributed

Credit: Contributed

If monthly inflation continues to moderate, Rankin expects the topline annual rate will be at about 7.9% in December.

“I don’t think regular Americans here in the Dayton region are going to feel great relief,” said Jeff Haymond, dean of Cedarville University’s School of Business Administration.

Even so, Rankin said, moderation in the monthly rate “would be a track record that the Fed had achieved its goal of slowing demand. And then supply chains slowly righting themselves will carry inflation the rest of the way toward 3.5% by mid-2023.”

PNC, which has its regional headquarters in Dayton, projects the Federal Reserve will add 100 basis points to the federal funds rate this year and approve an additional increase in early 2023, said Gus Faucher, PNC chief economist. The Fed’s goal is a 2% average inflation rate.

“Quite frankly, its pretty challenging. Even if (inflation) is turning slightly, it’s going to take quite awhile to trickle down to small- and mid-size manufacturing companies,” said Jim Bowman, owner, president and CEO of Noble Tool of Dayton.

“I think fear of recession has a lot of our customers in the industrial sectors kind of pulling things in. They’re not investing in capital projects (and) if they can do the work in house they are not outsourcing manufacturing services.”

Housing sales decline but prices are up

People are also cutting back on home-buying after seeing mortgage rates rise to 6% in June. Rates are now hovering around 5%, said Billie Duncan-Hart, president of Dayton Realtors and associate partner at Coldwell Banker Heritage.

“It’s not a bad interest rate,” she said. “We’ve just been spoiled the last few years.”

In July home sales declined nationally by 20.2% and by 9.35% in the Dayton region compared to July 2021, according the the national and Dayton realtor associations.

But prices continued going up. In the Dayton region the median price increased by 17.6% to $223,500. Nationally it was $403,800, a 10.8% increase year-over-year.

Duncan-Hart doubts home prices will go down substantially. In her 30 years of selling real estate in the area, the only time she has seen housing prices drop is when something negative is going on in a neighborhood, like the foreclosures that decimated some neighborhoods in the Great Recession.

But Duncan-Hart expects that Dayton region buyers will have more choices and be less prone to pay more than asking price in the months ahead.

Credit: Contributed

Credit: Contributed

“When the pandemic hit, things went haywire. Houses were going for over asking (price),” Duncan-Hart said. “June was kind of a transitional month where we started seeing things linger on the market a little longer, not seeing as many offers on one house and competing offers and over asking.”

Housing costs make up about 43% of CPI, so higher prices for rent and homes has a powerful impact on inflation and the economy.

“It means you are spending more and more of your income on housing, which means you have less to spend on other things. That’s got negative impacts on consumer spending, and it also has negative impacts on the ability to attract workforce,” LaFayette said. “And so population growth slows. Economic growth slows.”

He and others blamed high prices on lack of enough housing, a problem that pre-dated the pandemic, and say slowing construction activity will aggravate that.

“Lack of supply will prolong the path to house price equilibrium,” Rankin said.

Consumer spending

Rankin said savings rates are declining and credit card balances are rising, both signs that despite their complaints about things costing too much, consumers are continuing to spend, and not just on necessities.

“And until that slows, until spending gives in, we’re still going to have some inflationary pressure and consumer prices just go up,” Rankin said.

Credit: Contributed

Credit: Contributed

He said moderating spending means less money will be chasing a limited supply of goods, giving supply chains a chance to recover and reducing businesses’ pricing power.

“That soft landing possibility is there, but it is fully dependent on consumers taking their cues from the current environment and not just continuing the habits, the lifestyle and spending habits that they have become accustomed to,” Rankin said. “Our baseline forecast is achieving that soft landing, and it will be very soft.”

Credit: Alexis Larsen

Credit: Alexis Larsen

One of the biggest problems for businesses is that there are simply fewer people in the labor market to fill job openings. The labor force participation rate, which measures the number of people working or looking for work, is 62.1%, still below the pre-pandemic rate of 63.4%.

“I’m not surprised at, even during the slowdown, the number of jobs being added. We’re short of workers from where we were 2020,” said Rea Hederman Jr., vice president of policy at The Buckeye Institute, a conservative-leaning think tank in Columbus. “It’s not like a typical economy that is entering into a slowdown. It’s an economy that is still short-staffed.”

It’s not fully clear where those people went, but experts say it is a combination of factors, including retirements, discouraged job seekers, women unable to return to the workforce due to child care challenges, lingering fear of catching COVID in the workplace, and working-age people who were among the more than 1 million who died of COVID in the U.S.

Many companies are holding on to the employees they have, said Michael Hart, leader of management advisory services at Schneider Downs, a Pittsburgh-based consulting firm.

“One thing that I’ve seen is that because it is difficult to find and retain talent some of these (company) presidents are so busy working in the business that they don’t have time to work on the business,” Hart said, noting that he advises company leaders to make sure they take time for strategic planning so they will be ready if a recession comes.

LaFayette said it will be a continuing challenge for the economy to avoid recession.

“Near term things will slow. They have slowed. We’re not going to see 6% GDP growth again any time soon,” LaFayette said. “We may go into a recession, probably not a bad recession. But over the long term we will come out of it and we will start growing again. And inflation will be beaten.”

SEE MORE to this story:

Inflation concerns: How much are prices going up for common items?

What experts are saying: How is the economy doing in Dayton?

PHOTOS: Dayton region businesses grapple with inflation, staffing, supply chain

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