The US economy did not receive the recession memo

New York
CNN Business

The US economy didn’t get the memo that it should already be in a recession.

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

And in some ways it makes sense: Since 1948, every period of back-to-back quarters of negative growth coincided with a recession.

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

Yes, the economy is cooling after last year’s gangbusters growth. But no, it doesn’t seem to be suffering the kind of doom that would qualify as 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 for the lowest level since 1969.
  • Inflation eased (in relative terms) in July for both consumers and producers.
  • Gas prices fell below $4 a gallon for the first time since March.
  • Consumer sentiment has hit record low levels.
  • The stock market achieved its longest weekly winning streak since November.

Mark Zandi, chief economist at Moody’s Analytics, has only become more confident that the US economic recovery is intact.

– This is 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.”

Zandi said the only thing that signals an ongoing recession is the back-to-back quarters of negative GDP. Nevertheless, he predicted that these GDP declines will eventually be revised away. And there are early indicators that GDP will be positive this quarter.

Of course, none of this means the economy is healthy. It is not. Inflation is still too high.

And none of this means that the economy is out of the woods. It is not.

A recession remains a real risk, especially next year and in 2024 as the economy absorbs the full impact of the Federal Reserve’s monster rate hikes.

And it’s still possible that the economy stumbles so much in the months ahead that economists at the National Bureau of Economic Research, the official arbiter of recessions, finally declare that a recession began in early 2022. But for now, it’s far too early to say case.

Hear the financial expert’s tips on how to prepare for a recession

The biggest problem with arguing that a recession has already begun is the fact that hiring increased — dramatically — in July. The US added a staggering 528,000 jobs last month, returning payrolls to pre-Covid levels.

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

“I don’t think anything in the data about where we are right now in the economy is consistent with what we typically think of as 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 the months ahead because it allows the Federal Reserve to aggressively raise interest rates without resulting in widespread damage to the labor market in its attempt to slow the economy.

The risk is that the Fed ends up slamming the brakes so hard that it slows the economy straight into a recession.

There is a growing sense that perhaps the worst is over on the inflation front.

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

In addition to petrol, the prices of diesel and jet fuel are also falling, which eases the inflationary pressure on the rest of the economy.

The energy slowdown lowered inflation readings in July and should do the same, if not more, in August.

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 alarmingly high, it is down from the 40-year high of 9.1% in June. And, month over month, prices were little changed.

Wholesale inflation may also be at its peak. The producer price index, which measures the prices paid to producers for their goods and services, declined in July by more than expected on a year-on-year basis. And PPI fell month-on-month for the first time since the economy was shut down in April 2020.

The better-than-expected inflation reports reflect not only lower energy prices but also easing stress on supply chains disrupted by Covid-19.

In some ways, the recession debate is semantics.

Recession or not, Americans are clearly hurting right now because the cost of living is too high. Real wages, adjusted for inflation, are shrinking. And while consumer sentiment as measured by the University of Michigan has risen for two consecutive months, it remains near record lows.

But for many, an actual recession will be far more painful than the current environment.

A recession is likely to mean the loss of not just hundreds of thousands, but millions of jobs. Unable to pay the mortgage, families will face foreclosure on their homes. And small, medium and large businesses would go under.

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

But flashing red lights in the bond market suggest that could change.

The yield curve – specifically the gap between 2- and 10-year government yields – remains inverted. And in the past, this has been an eerily accurate predictor of recessions. It has preceded every recession since 1955.

Overall, recent economic data suggest that the potential recession may have been delayed, not canceled entirely.

While the risk of a recession in the next six to nine months appears to have gone down, Zandi said, the risk of one in the next 12 to 18 months has gone up.

“Recession odds remain uncomfortably high,” he said.

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