There is a strong connection between the economy’s gross domestic
product, unemployment rate and inflation, and recessions impact these
factors the largest. However, these cumulative numbers don’t always
translate on smaller scales like Manhattan, Kansas.
There are different levels of connection between economic factors and
major recessions. For example, every major recession features a spike in
unemployment and a fall in inflation due to lower demand for goods and
services. This is because recessions are a slowdown in economic
activity, meaning less money is being circulated from businesses and
individuals alike.
The National Bureau of Economic Research declares major recessions, and
defines them as,
according to its website, “a significant decline in economic activity that is spread across the
economy and lasts more than a few months.” Its three criteria — “depth,
diffusion, and duration” — drive the decision-making process. A deep
economic downturn may offset a short-lived duration. This explains why
the COVID-19 recession marks an exception as the shortest-defined
recession in U.S. history.
The unemployment rate and recessions have the most clear-cut
relationship among these economic interactions. Although inflation
typically falls during recessions and GDP reflects the effects of
recessions, both fluctuate during normal times more erratically than the
unemployment rate. The unemployment rate always rises during and
sometimes shortly after a recession, then slowly decreases over time
until the next recession hits.
The U.S. Bureau of Labor Statistics calculates the unemployment rate by
taking the number of unemployed as a percentage of the nonfarm labor
force. The inflation rate is calculated from the U.S. Inflation
Calculator by taking the current month’s CPI divided by the same month
one year prior. The GDP is calculated by the Philadelphia Federal
Reserve Bank looking back at quarter-over-quarter growth from the Bureau
of Economic Analysis’s data.
Since recessions impact the economy so negatively, it’s up to the
Federal Open Market Committee to help curve its effects and keep
recessions as short as possible to get the economy back on track. The
FOMC controls the federal funds rate which is, according to the Federal
Reserve, “the interest rate at which depository institutions lend
reserve balances to other depository institutions overnight.”
Typically, the FOMC raises the interest rate to curve inflation and
lowers it when a recession hits. A higher federal funds rate means a
higher interest rate on loans from banks while lower federal funds rates
decrease interest on loans. This means raising the interest rate cools
off inflation caused by high economic activity and lowering the interest
rate increases economic traffic that may otherwise be discouraged by an
economic recession.
However, times occur where inflation rises as the GDP drops. In quarters
one and two of 2022, the federal funds rate continued to climb due to
high inflation despite a minor recession. According to the U.S.
Inflation Calculator, the average inflation rate this year sits at 8.2%,
the highest it’s been since 1981. Weathering this record-high number has
taken priority over jumpstarting the economy, but fortunately the
economy has started turning around in quarter 3 of 2022.
In practice, higher inflation rates mean higher prices, GDP reflects
economic growth and the unemployment rate tells how much of the
workforce can find labor. The federal funds rate tries to keep all of
this in balance, keeping inflation low but greater than 0, keeping the
GDP in the positive and making sure unemployment isn’t too high nor too
low. However, these practices cover the entire country and don’t always
translate on a smaller market scale such as Kansas State University.
Every year, the Economics Club at K-State collects data to reflect the
CPI of an average K-State student in what the club dubs the Student
Price Index. The SPI analysis bundles of goods relevant to Wildcats such
as pizza, beer, tuition and on- and off-campus housing. Sydney Rehagen,
vice president of the econ club and senior in economics and supply chain
management, spearheaded this year’s report, marking the 20th SPI the
club has tracked.
“K-State started this 20 years ago, and it’s been a really good
experience to get people involved in the econ club and an introduction
to general economics in their everyday lives,” Rehagen said.
The country’s average inflation, taken by averaging each month’s
inflation using CPI data, stayed lower than K-State’s up until 2019 when
K-State recorded an all-time low at 0.4. The country’s inflation rate
was close to the SPI in 2020 (1.5-1.2), but K-State’s SPI ended far
below the country in 2021 and 2022.
Daniel Kuester, K-State economics professor and adviser of the economics
club, said Manhattan has a more stable economy because of enterprises
such as K-State, Fort Riley and the National Bio and Agro-Defense
Facility.
“Those [enterprises] are not transient things; those are things that are
here to stay,” Kuester said. “That I think leads to the overall
stability of people coming and going [and] people having some expendable
income.”
Kuester said housing prices in Manhattan didn’t have the same
fluctuations during and after the Great Recession that other areas
experienced, and that the employment rate tends to be flatter and less
severe when other parts of the country are hit hard. He said in general
the highs in the Manhattan economy tend to be less high than they are
nationally but the lows are less low.
“College towns in general tend to do reasonably well compared to the
extreme fluctuations in the overall economy,” Kuester said. “But I would
say here in Manhattan we’re even better off that way than in other
places.”
Ceteris paribus, it’s going to be a tough job for the FOMC to get the
economy back on track. Following economic trends, interest rates will
more than likely continue to rise until inflation returns to normal. The
Federal Reserve Board’s recent announcement on Dec. 14
helps confirm this, as the board unanimously agreed to raise the
interest rate by .25%, the board’s sixth increase since the beginning of
the year.
There’s a chance the first two quarters of 2022 will be considered a
recession. Between inflation and two consecutive quarters of negative
GDP, the time period — by the NBER’s own definition — qualifies for such
status. On the bright side, we look to be on the tail end of it, as the
GDP has so far been positive for the third quarter of 2022 with
a lower 7.1% inflation rate for November, the fifth-consecutive month which saw a — albeit slightly — decreased
rate.