New York (CNN Business) – The US economy has not received a reminder that it is actually supposed to be in a recession.
The brutal GDP report released on July 28, which showed that the economy contracted for the second consecutive quarter, led some to insist that a much-feared recession has already arrived.
And in a logical way: since 1948, every successive period of negative growth has coincided with a recession.
But the argument that a recession is already here has been seriously undermined since the release of the GDP report. A series of events over the past 10 days suggests that these recession announcements are premature, to say the least.
Yes, the economy is slowing down after last year’s runaway growth. But no, it doesn’t seem to be experiencing the kind of downturn that could be called a recession.
Consider the following events:
- The economy added more than half a million jobs in July alone.
- The unemployment rate fell to 3.5%, the lowest level since 1969.
- Inflation calmed down (relatively) in July, both for consumers and producers.
- Gasoline prices fell below $4 a gallon for the first time since March.
- Consumer confidence rebounded from historic lows.
- The stock market posted its longest streak of weekly gains since November.
Mark Zandi, chief economist at Moody’s Analytics, increased his confidence that the US economic recovery is sound.
“This is not a recession. It’s not even in the same universe as a recession,” Zandi told CNN. “It is obviously wrong to say that it is.”
Zandi said that the only thing that indicates continued stagnation is those consecutive quarters of negative GDP. However, he predicted that these declines in GDP would end up in revision. Early indications are that GDP will be positive this quarter.
Of course, none of this means the economy is sound. it’s not. Inflation is still very high.
None of this means that the economy is out of trouble. it’s not.
Recession remains a real risk, especially in the coming year and in 2024, when the economy will absorb the full impact of the Fed rate hike.
And the economy will still likely falter so badly in the coming months that economists at the National Bureau of Economic Research, the official arbiter of recessions, will end up announcing that the recession will start in early 2022. But for now, it’s too early to say . confirmed it.
The job market is still hot
The biggest problem with saying a recession has already begun is the fact that hiring accelerated – dramatically – in July. Last month, 528,000 jobs were created in the US, bringing salaries back to pre-crisis levels.
The economy is in recession not adding half a million jobs in one month.
“I don’t think any of the data on the current state of the economy is in line with what we think is a recession,” Brian Dies, director of the White House National Economic Council, said in a phone interview with CNN. last week.
Anyway, the job market is very hot. This is a problem for the coming months as it allows the Federal Reserve to raise interest rates aggressively without causing widespread damage to the labor market while trying to slow the economy.
The risk is that the Fed will end up slamming the brakes so hard that it will slow the economy into recession.
Inflation finally slowed
There is a growing feeling that the worst is over on the inflation front.
The biggest headache for inflation, the gasoline prices, is finally starting to subside considerably. The national average for regular gasoline has fallen by more than $1 since hitting an all-time high of $5.02 a gallon in mid-June.
In addition to gasoline, diesel and jet fuel prices are also falling, reducing inflationary pressure on the rest of the economy. The energy slowdown lowered inflation indicators in July and should do the same, if not more, in August.
The Bureau of Labor Statistics noted last week that consumer prices rose 8.5% in July from a year earlier. Although this number is still alarmingly high, it is less than a 40-year high of 9.1% recorded in June. And from month to month, prices hardly 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, slowed in July more than expected on an annual basis. The producer price index fell on a monthly basis 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 less pressure on supply chains affected by the COVID-19 virus.
What would a recession look like?
In a way, the stagnation debate is a semantic one. Recession or not Recession, Americans are clearly suffering right now because the cost of living is too high. Real wages, adjusted for inflation, are deflation. And while consumer sentiment, according to University of Michigan estimates, has risen for two months in a row, it is still near record lows.
However, for many, the actual recession will be far more painful than the current environment.
A recession would likely mean the loss of not just hundreds of thousands, but millions of jobs. Unable to afford the mortgage payments, families will face foreclosure on their homes. Small, medium and large companies will go bankrupt.
None of these things happen in any significant way, at least not yet.
But the flashing red lights in the bond market suggest that could change.
The yield curve — specifically, the gap between 2-year and 10-year Treasury yields — remains inverted. And in the past, this was a frighteningly accurate indicator of recessions. It has preceded every recession since 1955.
However, recent economic data suggests that a possible recession may have been delayed, not completely canceled out.
Zandi said that although the risk of a recession in the next six to nine months appears to have decreased, the risk of a recession in the next 12 to 18 months has increased.
“The odds of a recession remain uncomfortably high,” he said.