Inflation: Working Americans are feeling ‘purchasing power of wages’ waning, economist says

Alan Blinder, Princeton University Professor of Economics and Public Affairs, joins Yahoo Finance Live to examine recession concerns amid declining GDP, the Fed's rate hike, and inflation's impact on sustainable wage growth.

Video Transcript

RACHELLE AKUFFO: But one thing that a lot of people are still wondering about is whether or not America is in a recession or not. Now, that's the lingering question among the nation's leaders and economists in recent days. And despite a number of factors weighing on the economy, including today's less than ideal GDP data, those in charge seem convinced that the future is promising. And that includes Treasury Secretary Janet Yellen, who spoke on the matter earlier. Take a listen.

JANET YELLEN: Most economists and most Americans have a similar definition of recession, substantial job losses, and mass layoffs, businesses shutting down, private sector activity slowing considerably, family budgets under immense strain, in sum, a broad-based weakening of our economy. That is not what we're seeing right now when you look at the economy.

RACHELLE AKUFFO: Well, joining us now to offer more insight on the state of the economy is Princeton University Professor of Economics and Public Affairs and Former Vice Chair of the Federal Reserve Alan Blinder. Alan, thank you so much for joining us today.

ALAN BLINDER: Sure. How are you?

RACHELLE AKUFFO: So obviously, trying to assess what we're seeing with this-- good, thank you. Trying to assess what we're seeing in terms of this technical recession, how should this be viewed in light of, as what Fed Chair Powell was saying about the strength of the labor market?

ALAN BLINDER: Well, as has been true since the pandemic started, for going on more than two years now, data keep coming in and confusing and unusual ways. So for example, to your question, we don't usually see two quarters of-- I don't think we've ever seen, frankly, two quarters of GDP decline, which we've just registered, while jobs are still being created and not just created, at a very healthy pace. You're talking about over 300,000 jobs per month, whereas for replacement purposes, because the population is getting bigger, the norm is probably more like 100,000 a month.

So in a real sense, the job market is not only tight but getting tighter. And yet the GDP is showing these declines. It's very weird.

Now, this number that just came out today is dominated by deaccumulation of inventories. Without the inventories, that was basically a minus 1% number. Without the inventories, it would have been closer to a plus 1% number, which is still not strong, but it's not negative either.

DAVE BRIGGS: I spent far too much time trying to figure that out. And it appears 1947, we had back to back GDP contractions without going to recession. That's the only one I could find in all that time, Alan. But the question is, are you seeing--

ALAN BLINDER: I was only two years old at the time.

[LAUGHTER]

DAVE BRIGGS: I was not going to go there, my friend. Are you seeing any signs that the Fed is succeeding?

ALAN BLINDER: Yes. And you're seeing it not where people are looking for it. People are looking for it in inflation going down much more rapidly than history suggests should happen when the Fed tightens. You do think it will happen, but it takes a while.

But where we really see it having an impact right away is in the most interest-sensitive piece of the economy, which is housing. Every indicator of housing, from traffic through realtors to housing starts to new sales and resales and everything is down on the housing front, which is where you expect the Fed to have its biggest effect.

SEANA SMITH: And Alan, you were vice chair of the Fed when the bank was tightening monetary policy back in the '90s, '94, '95. From your perspective when you were at the Fed at that time, what do you think the Fed today can learn from what you guys did back in the '90s.

ALAN BLINDER: Well, I think what they can learn-- and I wrote about this a little bit in my "Wall Street Journal" piece the other day-- is patience. It's hard to be patient. We humans are not naturally patient, although I must say, Fed people are a lot more patient than market people are.

But they're not going to have the effect they want on inflation for a while. They have to view it as, they put something in the pipeline. And it takes a while to come out the other end. There's a tendency historically, which we did not do in '94 or '95, the episode you're alluding to, to look around, say, not enough is happening, let's do more, and to overdo it.

It can go in either direction. You can overdo it on easing. You can overdo it on tightening. That, I think, is the main lesson today's Fed people could learn from our experience in the mid-'90s.

RACHELLE AKUFFO: And Alan, I want to talk to you about the consumer and, obviously, how middle-income Americans are doing because a lot of people are saying, look, we pretty much telegraphed this recession and, in fact, perhaps spoke it into existence because of the fears about it. What is this doing to middle class Americans? And what should they be expecting now with this now back to back 75 basis point hike?

ALAN BLINDER: Yeah, well, I think middle class Americans are feeling the inflation, which reduces their purchasing power. Wages are going up more rapid rates than has been true in recent years, but they're not keeping up with inflation. So the real purchasing power of wages is falling. And working Americans feel that.

It's not an illusion. It's actually happening to them. That's one reason-- it may be the main reason. Hard to know. But it's certainly one reason why consumer spending is weakening. Now, it didn't plummet in the second quarter. But it's kind of on the weak side. And that's the worrisome sign.

I watched your little clip of Secretary Yellen before. And I agree with her. But there is reason to worry in the second quarter numbers. And that's the main one to me, the weak consumer.

DAVE BRIGGS: Indeed. Senator Elizabeth Warren wrote in "The Wall Street Journal" the other day that low unemployment and high inflation are painful, but a Fed-manufactured recession that puts millions of Americans out of work without addressing high prices would be far worse. What do you make of that argument? And how many jobs will indeed have to be lost, in your estimation, for us to stay out of a recession?

ALAN BLINDER: Well that last is the $64 trillion question. I don't know. The Fed is trying to be as gentle as they can.

I want to contrast this. Some people are drawing parallels to the early '80s, the late '70s and early '80s, when the inflation rate weren't really high. The Fed then really had to clamp down. Things were going out of control. Inflation was getting embedded in a whole variety of ways. And millions of jobs were lost.

Today's Fed is trying to have a much gentler touch. Jay Powell has talked about a soft-ish landing. So it's conceivable, starting from where we are with such a very low unemployment rate and such high levels of job creation, that we could do this without real job losses or maybe minimal job losses, just fewer gains than we would have if the Fed was not slowing the economy.

But slowing the economy does mean slowing job growth. That's almost arithmetic.

SEANA SMITH: So Alan, right now, as it's been over the past two months, we have two back to back 75 basis point hikes. You were talking about the importance of being patient right now, for the Fed to take a slower approach. What does that slower approach look like in the fall? Are we talking a 50 basis point hike, 25 basis point hike? Lay that out for us.

ALAN BLINDER: So I'm going to answer your question. But first, I'm going to preface it by saying, nobody really knows because it depends on what's going on with the economy, both on the real side and the inflation side.

Based on currently popular forecasts, my guess would be that the Fed does another 50 basis points in September and then steps back to look at its handiwork. So it might stop there or pause there for a while and see what happens, or it might just ratchet down to 25 basis points. Subtle questions like that for September and for after September certainly can't be answered in July. And the Fed's not going to try to answer them. But I think it's going to depend on how the economy behaves, how much it slows down, and especially on how much inflation falls.

SEANA SMITH: Mr. Blinder, always great to have you. Come back to us here at Yahoo Finance. Thanks so much for taking the time to join us.

ALAN BLINDER: Thank you.