Analysis: U.S. recession fears run counter to reality

A brutal GDP report released on July 28 showing the economy contracting for the second quarter in a row has led some to insist that the much-feared recession is already here.

And in a sense, this makes sense: since 1948, every consecutive quarter of negative growth has coincided with a recession.

But the argument that a recession has already begun has been seriously undermined since the release of the GDP report. A number of events over the past 10 days suggest that these calls for a recession are, at the very least, premature.

Yes, the economy is cooling off from last year’s gangster boom. But no, it doesn’t seem to be experiencing a drop that could qualify as a recession.

Consider the following events:

  • In July alone, the economy added more than half a million jobs.
  • The unemployment rate fell to 3.5%, the lowest level since 1969.
  • Inflation slowed down (conditionally) in July for both consumers and producers.
  • Gas prices fell below $4 a gallon for the first time since March.
  • Consumer sentiment has rebounded from a record low.
  • The stock market recorded its longest weekly winning streak since November.

Mark Zandi, chief economist at Moody’s Analytics, was even more confident that the US economic recovery continues.

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

Zandi said the only thing that signals an ongoing recession is alternating quarters with negative GDP. However, he predicted that this decline in GDP would eventually be reversed. And here early signs that GDP will turn positive this quarter.

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

And all this does not mean that the economy is out of control. This is not true.

A recession remains a real risk, especially next year and in 2024, as the economy will fully absorb the effects of the Federal Reserve’s monstrous interest rate hike.
And the possibility remains that the economy will stumble so badly in the coming months that economists at the National Bureau of Economic Research, the official arbiter of recessions, will eventually claim a recession began in early 2022. But it’s still too early to talk about it. this is the case.

The job market is still hot

The biggest problem with the claim that the recession has already begun is that recruitment skyrocketed in July. The United States added a staggering 528,000 jobs last month, bringing payrolls back to pre-Covid levels.

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

“I don’t think anything in the data about where we are right now in the economy is consistent with what we usually think of as a recession,” Brian Deese, director of the White House National Economic Council, told CNN. last week.

In any case, the labor market is too hot. And that’s a problem for the coming months, because it allows the Federal Reserve to aggressively raise interest rates without causing serious damage to the labor market in its quest to slow the economy.

The risk is that the Fed will end up hitting the brakes so hard that it will slow the economy right into a recession.

Inflation is finally cooling down

There is a growing feeling that perhaps the worst of the inflationary front is behind us.

The biggest inflationary headache – gas prices – are finally coming down significantly. On a national average, regular gasoline has fallen more than $1 since hitting a record high of $5.02 a gallon in mid-June.

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

The energy cooldown brought inflation down in July and should do the same, if not more, in August.

Good news about inflation: Online shopping prices are suddenly dropping rapidly
The Bureau of Labor Statistics reported last week that consumer prices were 8.5% higher in July than a year earlier. While this remains alarmingly high, it is below a 40-year high of 9.1% in June. And month after month prices changed little.
Wholesale inflation may also reach its peak. The Producer Price Index, which measures the prices paid to producers for their goods and services, fell more-than-expected in July on a yearly basis. And the PPI has been declining month on month for the first time since the economy closed in April 2020.

Higher-than-expected inflation reports reflect not only lower energy prices but also an easing of stress in supply chains disrupted by Covid-19.

What will 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. Inflation-adjusted real wages are declining. And while consumer sentiment, as measured by the University of Michigan, has risen for two consecutive months, it remains near a record low.

For many, however, a recession would be far more painful than the current situation.

A recession will likely result in the loss of not only hundreds of thousands, but millions of jobs. Unable to pay their mortgages, families will face forfeiture of their homes. And small, and medium, and large businesses will go bankrupt.

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

But flashing red lights in the bond market suggest that this may be changing.
Gasoline prices fall below $4 for the first time in months
The yield curve—in particular, the gap between 2-year and 10-year Treasury yields—remains inverted. And in the past, it has been a frighteningly accurate predictor of a recession. It preceded every recession since 1955

Overall, recent economic data suggests that a potential recession may have been delayed rather than reversed entirely.

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

“The chance of a recession is still too high,” he said.

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