Atlanta Fed GDP tracking shows that the US economy is probably in a recession
Federal Reserve Leader Jerome Powell reacts as he testifies to a hearing in the Senate Banking, Housing and Urban Affairs Committee on the “Semiannual Monetary Policy Report to Congress,” on Capitol Hill in Washington, DC, USA, June 22, 2022.
Elizabeth Frantz | Reuters
A Federal Reserve tracker for economic growth points to an increased chance that the US economy has entered a recession.
Most Wall Street economists have pointed to an increased chance of negative growth going forward, but expect it not to come until at least 2023.
However, the Atlanta Fed̵[ads1]7;s GDPNow target, which tracks real-time economic data and adjusts continuously, sees second-quarter production fall by 1%. Together with the first quarter decline of 1.6%, it would fit the technical definition of recession.
“GDPNow has a strong track record, and the closer we get to the July 28 release [of the initial Q2 GDP estimate] the more accurate it becomes, “wrote Nicholas Colas, co-founder of DataTrek Research.
The tracker took a rather steep fall from its latest estimate of 0.3% growth on 27 June. Data this week showing further weakness in consumption and inflation-adjusted domestic investment led to the cut that put the period April to June in negative territory.
A major change in the quarter has been rising interest rates. In an effort to curb rising inflation, the Fed has raised its reference rate by 1.5 percentage points since March, with several increases likely to come through the rest of the year and perhaps into 2023.
Fed officials have expressed optimism that they will be able to tame inflation without sending the economy into recession. However, board chairman Jerome Powell said earlier this week that bringing inflation down is the most important job now.
At a panel discussion earlier this week presented by the EU, Powell was asked what he would tell the American people about how long it will take before monetary policy tackles rising living costs.
He said he would tell the public: “We fully understand and appreciate the pain people go through when dealing with higher inflation, that we have the tools to deal with it and the will to use it, and that we are committed to and will “The process is most likely to involve some pain, but the worst pain would be not to cope with this high inflation and let it persist.”
Whether it goes into recession is unknown. The National Bureau of Economic Research, the official judge for recessions and expansions, notes that two consecutive quarters of negative growth are not necessary for a recession to be declared. Since World War II, however, there has never been a case where the United States merged in subsequent quarters and was not in recession.
To be sure, this tracker can be volatile and fluctuate with each data release. However, Colas noted that the GDPNow model will become more accurate as the quarter progresses.
“The model’s long – term track record is excellent,” he said. “Since the Atlanta Fed first started running the model in 2011, its average error has been just -0.3 points. From 2011 to 2019 (excluding the economic volatility surrounding the pandemic), tracking error averaged zero.”
He further noted that US government interest rates have noticed the lower growth prospects, and have fallen significantly in the last two weeks.
“Equities have not taken any comfort from the recent decline in returns because they see the same problem presented in the GDPNow data: a US economy that is cooling rapidly,” Colas added.
