The US economy didn’t get the recession memo

A brutal GDP report released on July 28 showed the economy contracted for the second quarter in a row, leading some to insist that the much-feared recession is already here.

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

But since that GDP report came out, the recession-already-here argument has been severely undermined. A series of events over the past 10 days suggests that those bearish calls are at least premature.

Yes, the economy is cooling after last year’s gangbusters growth. But no, it doesn’t seem like it’s experiencing the kind of downturn that qualifies 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%, the lowest level since 1969.
  • Inflation cooled (relatively speaking) for consumers and producers in July.
  • Gas prices fell below $4 a gallon for the first time since March.
  • Consumer sentiment bounced back to record lows.
  • The stock market marked its longest weekly winning streak since November.

Mark Zandi, chief economist at Moody’s Analytics, has grown increasingly confident 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 wrong to say that.”

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

Of course, that means the economy is healthy. This is not. Inflation remains very high.

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

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

The job market is still hot

A big problem with the argument that the recession has already begun is that hiring increased — dramatically — in July. The United States added a staggering 528,000 jobs last month, returning payrolls to pre-Covid levels.

An economy in recession doesn’t add half a million jobs in a single month.

“I don’t think there’s anything in the data about where we are now in the economy that we would normally think of as a recession,” White House National Economic Council director Brian Dees told CNN in a telephone interview. last week

If anything, the job market is too hot. And that will be a problem for the coming months as the Federal Reserve allows the Federal Reserve to aggressively raise interest rates without causing widespread damage to the labor market in an effort to slow the economy.

The risk is that the Fed will end up slamming the brakes, slowing the economy right into recession.

Inflation is cooling, finally

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

The biggest inflation headache — gasoline prices — is finally easing in a big way. The national average for regular gasoline is now down more than $1 after hitting a record high of $5.02 a gallon in mid-June.

Apart from gasoline, diesel and jet fuel prices are also falling, easing inflationary pressure on the rest of the economy.

An energy cooldown lowered inflation metrics in July and should do the same, if not more, in August.

Good inflation news: Online shopping prices are suddenly falling fast
The Bureau of Labor Statistics said last week that consumer prices rose 8.5% in July from a year earlier. While this is alarmingly high, it is still below the 40-year high of 9.1% in June. And, from month to month, prices have changed little.
Wholesale inflation may also peak. The producer price index, which measures the prices producers paid for their goods and services, fell more than expected in July from a year earlier. 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 ease pressure on supply chains scrambled by Covid-19.

What a recession it feels like

In some ways, the regression debate is semantic.

Recession or not, Americans are clearly hurting right now because the cost of living is so high. Real wages adjusted for inflation are falling. And while consumer sentiment, as measured by the University of Michigan, has risen for two months in a row, it remains at a record low.

However, for many, a real recession is more painful than today’s environment.

A recession involves the loss of not just hundreds of thousands, but millions of jobs. Unable to make their mortgage payments, families face foreclosure on their homes. And small, medium and large enterprises will go down.

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

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

Overall, the latest economic data suggests that a potential recession may be delayed, not completely cancelled.

Zandi said that while the risk of a recession in the next six to nine months appears to be low, the risk of one in the next 12 to 18 months is high.

“Recession odds are still uncomfortably high,” he said.

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