The US economy didn’t get the recession memo

The stark GDP report released on July 28, showing the economy had contracted for a second consecutive quarter, led some to insist that the dreaded recession had already arrived.

And in some ways, that makes sense: since 1948, every period of consecutive quarters of negative growth has coincided with a recession.

But the argument that the recession is already here has been seriously undermined since that GDP report came out. A series of events over the past 10 days suggest that these calls for recession are, at the very least, premature.

Yes, the economy is cooling after last year’s gangbuster growth. But no, it doesn’t seem to be suffering the kind of fall that one would call a recession.

Consider the following developments:

  • The economy added more than half a million jobs in July alone.
  • The unemployment rate fell to 3.5%, tied with the lowest level since 1969.
  • Inflation subsided (all things considered) in July for both consumers and producers.
  • Gas prices fell below $4 a gallon for the first time since March.
  • Consumer confidence rebounded from record lows.
  • The stock market posted its longest weekly winning streak since November.

Mark Zandi, chief economist at Moody’s Analytics, is increasingly convinced that the US economic recovery is intact.

“It’s not a recession. It’s not even in the same universe as a recession,” Zandi told CNN. “It’s just plain wrong to say that it is.”

Zandi said the only thing that signals an ongoing recession is these consecutive quarters of negative GDP. Yet he predicted that these GDP declines will eventually be revised. And there are early indicators that GDP will turn positive this quarter.

Of course, none of this means the economy is healthy. This is not the case. Inflation remains far too high.

And none of this means the economy is out of the woods. This is not the case.

A recession remains a real risk, especially next year and into 2024, as the economy absorbs the full impact of the Federal Reserve’s monstrous interest rate hikes.
And it remains possible that the economy will stumble so much in the coming months that economists at the National Bureau of Economic Research, the official arbiter of recessions, will eventually declare that a recession has begun in early 2022. But for the moment, it is far too early to tell. it’s the case.

The job market is still hot

The biggest problem with the argument that a recession has already started is the fact that hiring rose – dramatically – in July. The United States added 528,000 jobs last month, bringing payrolls back to pre-Covid levels.

An economy in recession does not create half a million jobs in a single month.

“I don’t think anything in the data about our current state of the economy is consistent with what we generally consider to be a recession,” Brian Deese, director of the White House National Economic Council, told CNN in a phone interview. Last week.

If anything, the job market is too hot. And that’s a problem for months to come because it allows the Federal Reserve to aggressively raise interest rates without causing widespread damage to the labor market in its attempt to slow the economy.

The risk is that the Fed will end up squeezing the brakes so hard that it slows down the economy in the midst of a recession.

Inflation is finally cooling

There is a growing feeling that the worst may be over on the inflation front.

The biggest inflation headache – gas prices – is finally easing significantly. The national average for regular gasoline has now fallen more than $1 since hitting a record high of $5.02 a gallon in mid-June.

Beyond gasoline, diesel and jet fuel prices are also falling, easing inflationary pressures on the rest of the economy.

Cooling energy lowered inflation indicators in July and is expected to do the same, if not more, in August.

Good news on inflation: prices for online shopping drop suddenly and quickly
The Bureau of Labor Statistics said last week that consumer prices were 8.5% higher in July than they were a year earlier. While still alarming, it is down from the 40-year high of 9.1% in June. And, month after month, prices have changed little.
Wholesale inflation could also peak. The producer price index, which measures the prices paid to producers for their goods and services, slowed in July more than expected on a year-over-year basis. And the PPI fell month-on-month for the first time since the economy shut down in April 2020.

The better-than-expected inflation reports not only reflect lower energy prices, but also easing tensions in supply chains scrambled by Covid-19.

What would a recession look like

In some ways, the recession debate is semantic.

Recession or not, Americans are clearly suffering right now because the cost of living is too high. Real wages, adjusted for inflation, are falling. And although consumer sentiment as measured by the University of Michigan has climbed two months in a row, it remains near record lows.

However, for many, a real recession would be much more painful than the current environment.

A recession would likely result in the loss of not just hundreds of thousands, but millions of jobs. Unable to make their mortgage payments, families would face foreclosure on their homes. And small, medium and large companies would go bankrupt.

None of these things are happening in any meaningful way, at least not yet.

But flashing red lights in the bond market suggest that could be changing.
Gas prices fall below $4 for the first time in months
The yield curve – specifically, the spread between 2-year and 10-year Treasury yields – remains inverted. And in the past, it’s been an oddly accurate predictor of recessions. It has preceded every recession since 1955.

Overall, recent economic data suggests that the potential recession may have been delayed, not completely reversed.

While the risk of a recession over the next six to nine months appears to have diminished, Zandi said, the risk of a recession over the next 12 to 18 months has increased.

“The odds of a recession are still uncomfortably high,” he said.

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