Politicians will blame the Fed despite their own anti-growth policies.
by Wall Street Journal Editorial Board, August 3, 2024
Wall Street is chattering about recession again, and this week there’s evidence to back up the worry: bad economic data, a plunge in equities and the dispiriting Presidential campaign. Who to blame may preoccupy the election season.
Stocks took a header on Friday after the Labor Department reported that the economy added an underwhelming 114,000 jobs in July and the unemployment rate rose to 4.3%. The higher unemployment rate is in part a function of more people entering the labor force, which increased by 420,000.
But weekly new jobless claims are at an 11-month high, and growth in average hourly earnings is slowing. Employment growth remains concentrated in a handful of industries, notably healthcare and government, which together accounted for 63% of the new jobs. Manufacturing hit an eight-month low in the Institute for Supply Management’s monthly survey of sentiment—and is signaling contraction.
Doctor Copper, that old recession diagnostician, detects weakness: Copper prices are well off their peaks from May. Oil prices are down. The slowdown is global, after Communist Party leaders in Beijing recently indicated they have no plan to revive Chinese growth and Europe remains mired in big-state, no-reform economic and political malaise.
Corporate earnings have also been disappointing. McDonald’s sales fell globally for the first time in four years. Unilever, Nestle and other consumer-facing companies reported weaker-than-expected sales growth. Investors took particular fright over Intel, after the computerchip maker Thursday missed earnings estimates and announced it’s laying off 15% of its workforce. Its shares fell 26% on Friday, despite having been a big cash beneficiary of Washington industrial policy.
The Nasdaq fell more than 3% Friday and is approaching a correction of 10% from its last peak. Other American indices are falling, and global markets as well. Tokyo shares dropped nearly 6% Friday, their worst day since the start of the pandemic. This partly represents unease about tech companies, and more so a repricing of risk after the Bank of Japan on Wednesday raised interest rates and expressed its intent to bolster the yen.
The instinct in political quarters will be to blame the Federal Reserve. Chairman Jerome Powell this week signaled that an interest-rate cut is on the way in September, but the usual suspects on Wall Street and in the Democratic commentariat argued he should have cut rates sooner.
But Mr. Powell isn’t to blame for the economic slowdown. The Fed has had to tighten money to combat the inflation outbreak caused by overspending and too-easy money. And doing so isn’t an exact science.
So far at least, Mr. Powell has managed to reduce inflation without the recession that Keynesians told us was necessary. Interest rates aren’t high by historical standards in any event, and looking at asset prices and other markers it’s hard to argue that financial conditions are unduly tight. A rate cut may be appropriate in September, but the lack of one this week isn’t causing the current distress.
Blame instead the politicians. The U.S. economy never settled into a virtuous growth cycle after the pandemic because Washington kept creating headwinds. That includes a host of new regulations on productive parts of the economy and huge, misallocated subsidies for green energy and other political favorites.
Heading into November’s election, Democrats led by Kamala Harris promise more of the same regulation and subsidies, plus huge tax increases. Donald Trump wants to cut taxes and regulation. But he also vows a 10% across-the-board tariff reminiscent of the Smoot-Hawley tariffs that contributed to the Great Depression, plus a mass deportation of migrant workers who have been a source of growth.
Mr. Powell and the Fed have made mistakes, but they’ve managed the way down from 9.1% inflation reasonably well. They don’t deserve to be scapegoats for a recession, if one is coming. What we’d like to hear from one of the candidates isn’t blame but an agenda for faster growth and stable prices.