How to evaluate the economy as we march toward the midterm election

The economy is hotter than the sun, and it's being chilled by soaring inflation.

Confused? Now you're getting the picture. When it comes to the U.S. economy, there are no easy answers.

Less than two months before the midterm election, with early voting about to start in Illinois, it seemed like a good time to get answers from the experts about one of the key issues voters will consider: Is the economy in good shape?

So we invited a few economists to share their thoughts on the economy so we could get the unvarnished truth.

The politicians and their spin? Their invitations got lost in the mail this time. No political points will be scored here.

Breaking it down

There's a lot to like about the economy right now, starting with the surging jobs market and the strength of the consumer. But there's also significant drag being caused by unusually high inflation, an issue economists take very seriously.

Is it OK to be confused?

"Absolutely," said Ryan Decker, director of the Center for Financial Literacy at North Central College in Naperville. "Employment is fantastic right now. Unemployment is really low, which means incomes are high, or at least they're not low. Spending is still high. We're all coming out of that COVID fog and we want to go on vacations and we're spending money."

So it's a strong economy?

"Inflation in the long run is just not a good thing for households, not a good thing for businesses," said Stephen Juneau, senior U.S. economist at Bank of America, noting prices are rising almost like it's the 1970s again. "You're reducing purchasing power for both and you're also increasing costs for businesses. It's hard to kind of plan your business when you're constantly dealing with 10% cost increases. In the long run price stability is obviously the best outcome for economic growth."

Oh, yes, inflation, now about 8.5% but with signs that it is easing.

For instance, that's higher grocery costs and the gasoline prices that soared past $5 a gallon around the country. They've dropped significantly the last three months, under $4 a gallon in many areas of the country, if not the suburbs. At least not yet.

Part of the blame goes to Russia's invasion of Ukraine, which affected oil and grain prices. Part of it is supply-chain problems left over from the COVID-19 pandemic, though there is evidence that is easing now too. Part of it is the worker shortage, which also has some roots in the pandemic.

"It's a challenging question because the data has really sent these mixed signals. … There's an argument to be made depending on what data you look at," Juneau said.

In other words it's both strong and weak.

But in the short run Americans continue to spend like NFL teams hoping to discover a decent wide receiver.

"The job market still seems to be very strong, even as the economy itself seems to be slowing down," said Carl Campbell, chair of the NIU Economics Department. "GDP (gross domestic product) has actually declined a little bit the last two quarters. But fortunately, again, unemployment is still low."

Added PNC Chief Economist Gus Faucher in a report from the bank: "Inflation appears to have peaked in mid-2022 and should slow on a year-over-year basis through the rest of this year and in 2023. … But for inflation to continue slowing in 2023 the labor market must loosen a bit. The Federal Reserve is raising interest rates to cool off growth, and the impact is already showing up in a slowing housing market.

"The open question is whether the Fed can calibrate its rate increases finely enough to push inflation down to 2% over the next couple of years, but without pushing the economy into recession."

Ah, the Federal Reserve Board, the country's central banking system. As much as politicians like to take credit or cast blame on each other, the Fed is every bit as influential on our economy. Maybe more so.

The Fed has been raising interest rates in an effort to slow the surging economy and bring inflation back under control. Our economists expect that to continue, with the goal of reducing inflation to about 2%.

"We have this monetary policy and fiscal policy kind of at odds with each other right now because the federal government, on the fiscal side, doesn't want there to be a recession," Decker said. "The Fed (the monetary side) seemingly might not care all that much if higher interest rates put us into a recession. So battling that is going to be an interesting dynamic moving forward."

Don't say that word

There it is, the "R" word, recession.

Are we in a recession? That's the big question when it comes to the economy.

Some people use two consecutive quarters of negative GDP growth as a simple way to determine a recession.

"Quite frankly only the media does," Decker said. "No economist does."

OK, so the simple way is way too simplistic. But we could still be in a recession, right?

"Not with the job market so strong, no," Campbell said.

Juneau and Decker agreed.

OK, got it, no recession. For now.

But are we doomed to go into a recession in 2023 because the Fed almost surely will continue to raise interest rates to fight inflation?

Juneau and Campbell say yes, a recession is likely. The Fed's efforts to slow the economy but avoid a recession probably won't work.

Decker believes a so-called "soft landing" is possible as long as incomes and consumption stay high.

"But it's a bit dependent on the Fed," Decker said. "If the Fed is intent on getting us back to 2% inflation, we're going to continue to see interest rate hikes for the foreseeable future, and that has to have an effect."

"It's really hard to engineer a soft landing, and in the past the Fed has really not been able to do it," Campbell added.

Decker noted that mortgage rates are up 3% in past six months. In fact, last week the average U.S. 30-year mortgage rate climbed over 6% for the first time since the housing crash of 2008.

"That's going to cool down the housing market," he said of rising interest rates. "I mean there's no way around it. But I don't think that's really worked its way through the system yet. The housing market still is relatively strong."

So when politicians tell you the economy is great, or terrible, now you know the real deal. It's a little of both, and a lot is yet to be decided.

As stock traders work and watch, a news conference held by Federal Reserve Chair Jerome Powell is displayed at the New York Stock Exchange in late July. The Fed is raising interest rates to combat inflation. Associated Press
Applicants fill out forms at a job fair in Miami earlier this summer. Unemployment remains low in the U.S. and companies say they are having trouble finding enough workers to fill jobs. Associated Press
A customer shops at a Whole Foods in Washington, D.C. Consumer spending remains strong as Americans are benefiting from higher wages. The Washington Post
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