Inflation eases, signs of recession cloud economic outlook

TRANSCRIPT

Dick Pryor: This is Capitol Insider – we bring you insights into politics, policymaking and government in Oklahoma. I'm Dick Pryor and Quorum Call editor Shawn Ashley. Our guest is Dr. Robert Dauffenbach, professor emeritus at the University of Oklahoma's Price College of Business. Bob, great to have you with us today.

Robert Dauffenbach: Nice to be here.

Shawn Ashley: Dr. Dauffenbach, how would you characterize the current situation of the economy in light of the economic fluctuations?

Robert Dauffenbach: Well, it's actually a tale of two perspectives. And some of my economist friends see the positive side. They see that we've had quite good reports on gross domestic product growth, 2.8% was reported in June. Inflation is coming down. That's the positive. The unemployment rate is perhaps rising a little bit, but still pointing to full employment. On the other hand, I have other economist friends who think that we've had interest rates at very high levels for a long time, an inverted yield curve, higher short-term and long-term rates. That's here to stay. And that's probably going to continue to put pressure on the economy. And of course, we've seen an increase in the unemployment rate. And that's concerning. So some of my economist friends are on one side, some on the other, and I with my friends.

Dick Pryor: How is Oklahoma's economy doing?

Robert Dauffenbach: Oklahoma's economy, I'm afraid to say, is not very impressive in some respects. On the overall employment side, we certainly don't see too different results compared to the rest of the country. Since June 2019 — I choose that date because it predates the Covid pandemic — the U.S. economy, employment, has grown 5.1%, the state has grown 4.7%. But a lot of the growth is in Oklahoma City and Tulsa. Over that five-year period, Oklahoma City has gained 8.9% in employment and Tulsa has gained 3.6%, below the national average. Overall, the state outside of those two metropolitan areas has grown only 0.7%. Notably, state taxes are down year-over-year. And it has to be a concern that total tax revenues are down nearly 9% and severance taxes are down 40%. That's concerning.

Shawn Ashley: Inflation remains a problem. What has the Federal Reserve done to curb inflation?

Robert Dauffenbach: Well, the Federal Reserve came in a little late. They initially thought inflation was going to be temporary. And then when it became apparent that it wasn't temporary, they raised interest rates very dramatically, to historic levels, essentially from 0 to 5.3% in short-term rates. We've been at that level for about 14 months. And many thought that would have a very damaging effect on the economy. It turns out that the economy was more resilient than many would believe given those pressures on the economy. So they got in a little late, but they succeeded in bringing the inflation rate down.

Dick Pryor: Who has been helped by inflation and who among households and businesses has been hit hardest?

Robert Dauffenbach: The beneficiaries are, not surprisingly, the wealthy classes, because in essence interest rates have gone from very low to much higher. And of course the lower income groups have been hit by rising prices, to the point where they can no longer afford many purchases. There are signs everywhere of a decline in consumption. But small businesses and households are also being hit, and very dramatically.

Shawn Ashley: You mentioned that the Fed has succeeded in bringing down inflation, but is inflation now under control and on track to return to the Fed's 2% target?

Robert Dauffenbach: I'm pretty convinced we're headed for lower inflation rates. But the problem is that even though we're headed for lower inflation rates, we still have a much higher price level, and that affects business decisions and household spending even though we're reducing the inflation rate. It's still very damaging to the economy, and why the Fed has a 2% target, I don't know. Why not a 0% target?

Dick Pryor: What concerns do you currently have about the economic future of your state and Oklahoma?

Robert Dauffenbach: What I'm very concerned about at the national level is the ongoing deficits that we have. At the federal level, we have $2 trillion in deficits. $2 trillion. That's about 7% of GDP. And the cost of servicing the debt, buying bonds for expiring debt, is getting to a really troubling level. Servicing the debt is now at a level that's approaching what we spend on national defense annually. And the Congressional Business Office is projecting that those 7% deficits are going to continue well into the future, into the mid-'30s. The Social Security and Medicare trust funds and the Medicaid trust funds are going to be under a lot of pressure in the second half of the 2020s. So I expect that's going to be a very difficult discussion, and we just have taxes that are too low for the level of our entitlements.

Dick Pryor: Bob, thank you for joining us today.

Robert Dauffenbach: Nice to be here.

Dick Pryor: This is Dr. Robert Dauffenbach, professor emeritus at the Price College of Business at the University of Oklahoma. And this is Capitol Insider. Until next time with Shawn Ashley, I'm Dick Pryor.

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