AI art by Midjourney

Post-pandemic economy: Economy still suffering from COVID-19

Carter Schaffer

Published 10:40 p.m. CST December 14, 2022

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.

US GDP changes, inflation rates and unemployment rates of the 21st century

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.

How the FOMC comes into play

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.

Inflation at K-State vs. the country

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.”

Economic predictions going forward

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.

Data for this project was taken from multiple economic sources: Federal Reserve Bank of St. Louis, U.S. Inflation Calucator, Federal Reserve Bank of Philidelphia and the Economics Club at K-State. Data from FRED, Inflation Calculator, and Philadelpia FED were taken directly from their websites, and data from the K-State Econ Club was taken from press releases and articles directly from the club's archives. The data was cleaned from Microsoft Excel to Google Sheets. The cleaned data (including the raw data) can be found here.