Klepper-Smith says interest rates indicate likely economic recession

By Scott Benjamin

Donald Klepper-Smith, who advised former Gov. M. Jodi Rell (R-Brookfield) and has long been one of Connecticut’s most-quoted economists, says it appears that the United States is either in or on the verge of a recession.

“The interest rates tell us very loudly that a recession is here or about to start,” he remarked in a phone interview with Patch.com

Klepper-Smith pointed to the inverted bond yield curve, which measures long-term versus short-term borrowing.

“The last time the curve was this pronounced was in the early 1980s,” said the economist, referring the recession that arose when after more than a decade of high inflation then-Federal Reserve Board Chairman Paul Volcker and his colleagues aggressively raised interest rates. It broke the inflation cycle but resulted in a recession with a 10.8 percent unemployment rate in October 1982, the highest since World War II.

New York Times economics columnist Peter Coy recently wrote that noted economist Arturo Estrella of RPI, said that “every time the long-term rate became at least 0.07 percentage points lower than the short-term rate, the economy entered a recession within six to 17 months. The average gap so far in December is 0.81 percentage points.”

Klepper-Smith, who is the economic consultant for the Greater Danbury Chamber of Commerce, said that Bloomberg reported in December that based on the economists that they surveyed, there is a 70 percent chance of a recession in 2023.

However, the December national unemployment report indicates the rate is at 3.5 percent, a 53-year low. That would apparently contradict a pending recession.

“There has never been in the last 40 years a time when the unemployment rate has been so meaningless,” Klepper-Smith declared, indicating that the metrics for determining unemployment have been altered through the years and there reportedly are many unemployed people who are not seeking work.

“There are very confusing and mixed signals,” he added. “This is not a classic business cycle” because of the “ripple effects” from the pandemic.

Klepper-Smith said that supply chains have been disrupted and “a lot of goods are not being delivered to where they need to be, when they need to be.”

He said that he agreed with former Reagan Administration budget director David Stockman, who wrote in his recent book – “The Great Money Bubble” - that the Federal Reserve Board has printed too much money over recent years.

Stockman, who used to live in Greenwich, wrote, “So at [noted economist] Milton Friedman’s rule of thumb of 3 percent growth per year from its September 2008 level, the Fed’s balance sheet today should stand at $1.3 trillion. Alas, it’s actually pushing $8.8 trillion and expanding at a $1.44 trillion annual rate.”

Said Klepper-Smith, “We’ve had cheap money for the last 10 years, and [with the recent] fiscal stimulus [following the pandemic] it has put us in a position where inflation where inflation is bearing down on Connecticut consumers.”

He contends that, “The economic situation [in Connecticut] is not as rosy as people would make it out to be.”

CT Mirror reported Gov. Ned Lamont (D-Greenwich) said in his address on January 4 as the General Assembly started its new term that Connecticut no longer has a "permanent fiscal crisis" – a phrase that was used in 2014 by an official under his immediate predecessor, Dannel Malloy (D-Essex).

Klepper-Smith said Connecticut ranks 49th out of the 50 states in fiscal health according to the 2002 Truth In Accounting Report. The report stated that, “Connecticut continues to face challenges as fixed costs and debt service related to state pension and retirement healthcare systems represent a growing share of the state budget.”

He said although Connecticut has been recapturing jobs, it is still 48,000 positions below its peak from March 2008 and has 22,000 fewer than when Lamont took office four years ago this month. In fact, there are fewer people employed in Connecticut now than in 1989.

Connecticut has been coming back “inch by inch as opposed to yard by yard in the other states,” Klepper-Smith exclaimed. Although he noted that the Danbury labor market continues to “outperform” other sections of Connecticut.

Can Connecticut withstand an economic recession?

In an e-mail statement to Patch.com, state Sen. Stephen Harding (R-30) of Brookfield wrote, “I believe in some respects our state’s finances are fairly well prepared for a potential recession, primarily due to the nearly $5 Billion in the 'Rainy Day Fund.' This being possible due to the necessary long-term fiscal parameters implemented in our State's 2017 bipartisan budget.”

Harding continued, “However, in other respects we are not as well prepared. The legislature's approval of the 2021 budget, which balanced on $2 Billion in one-time Federal funds, along with the addition of billions of dollars in spending, due to the collective bargained agreements made with the state employee unions, will leave our state's budget with difficult challenges, if and when a recession hits.”

Klepper-Smith also pointed to higher costs for consumers.

CT Mirror has reported that Eversource, which supplies electricity to much of Connecticut estimates that its rate increase will cost the average consumer an additional $82 per month as a result of “the rising cost of natural gas and the price of power production in the Northeastern United States.”

Klepper-Smith exclaimed, “After people see their electric bills in January and February that is going to be a wake-up call for many households. There is not going to be a lot of disposable income laying around.”

In an e-mail statement to Patch.com, state Rep. Farley Santos (D-109) of Danbury wrote that the electricity costs “are, in effect, regressive tax increases.”

Klepper-Smith said a recession would be particularly harsh on people under age 40.

“The millennials don’t have the financial means to become first-time home buyers in the way that earlier generations have” because of their excessive college student-loan debt, explained Klepper-Smith.

He said that the average monthly car payment is now $721 per month. “That is not sustainable at these rates.”

The Wall Street Journal recently reported that in 2022 the stock market had its worst year since 2008, which potentially has a large impact on Connecticut with a considerable number of residents in the Fairfield County Gold Coast working in financial services.

Klepper-Smith remarked, “You are going to see a further deterioration in capital gains.”

Additionally, Klepper-Smith said that as is the case across the country, Connecticut’s commercial real estate market has declined as a result of more people working from home since the pandemic.

In his recent address, Lamont called for “a meaningful middle-class tax cut” but did not provide a specific proposal, according to CT Mirror.

Klepper-Smith said that with the recent surge in inflation a “proposed tax cut would make sense,” particularly for lower- and middle-income residents.

Connecticut’s minimum wage of $14 an hour is scheduled to increase on July 1 to $15 an hour, well ahead of the federal minimum wage.

Klepper-Smith said as a result of “economic polarization” – the gap between the upper- and lower-income classes -he supports increasing the minimum wage.

He said, “[The inequity] has to be mitigated to some extent.”

Resources:

Phone interview with Donald Klepper-Smith, Patch.com, Tuesday, January 3, 2023.

E-mail statement from Farley Santos, Patch.com, Thursday, January 5, 2023.

E-mail statement from Stephen Harding, Patch.com, Friday, January 6, 2023.

https://www.wsj.com/articles/u-s-stocks-close-out-worst-year-since-2008-11672438323

https://www.wsj.com/articles/office-owners-already-reeling-from-remote-work-now-face-recession-risk-in-2023-11672710408

https://ctmirror.org/2022/12/15/ct-eversource-rate-increase-ui-electricity

httphttps://www.wsj.com/articles/d...

hs://ctmirror.org/20 22/10/28/ct-rainy-day-fund-is-full-fonfara-15-20-percent/

https://www.truthinaccounting.org/library/doclib/FSOS-2022.pdf

https://en.wikipedia.org/wiki/Paul_Volcker

https://www.amazon.com/Great-Money-Bubble-Yourself-Inflation/dp/1630062197

https://www.nytimes.com/2022/12/21/opinion/inverted-yield-curve-recession.html

Dannel Malloy talk, Western Connecticut State University, April 1, 2010.

https://patch.com/connecticut/...