Figures show the US economy is at least teetering on a recession

Foreman Angel Gonzalez and Anthony Harris with EZ Bel Construction work on pipes along Fredericksburg Road during an excessive heat warning in San Antonio, Texas on July 19, 2022.

Lisa Krantz | Reuters

The White House is confident that the economy is not in recession or heading into a recession. Wall Street is pretty sure there’s no recession now, but isn’t so optimistic about what lies ahead.

Looking at the data, the picture is indeed nuanced. Nothing at the moment is screaming recession, although there is a lot of talk. The job market is still pretty good, manufacturing is weakening but still expanding, and consumers still seem pretty cash-rich, even if they’re a little less willing to part with it these days. .

So, with second-quarter GDP data due out Thursday, the question of whether the economy is simply in a natural slowdown after a robust year in 2021, or a more pronounced slowdown that could have prolonged repercussions, will be in everyone’s mind.

“This is not an economy in recession, but we are in a transition period where growth is slowing down,” Treasury Secretary Janet Yellen told “Meet the Press” on Sunday. “A recession is a generalized contraction that affects many sectors of the economy. We just don’t have that.”

On Monday, Kevin Hassett, head of the National Economic Council in the Trump administration, pushed back against that idea and said the White House was making a mistake by not acknowledging the realities of the moment.

“We’re…kind of in a recession, aren’t we? So it’s a tough time,” Hassett, who is now a distinguished senior fellow at the Hoover Institution, told CNBC’s Andrew Ross Sorkin during an interview. a live “Squawk Box” interview.

“In that case, if I was in the White House, I wouldn’t be denying that this is a recession,” he added.

Two negative quarters

If nothing else, the economy at least has a good chance of hitting the empirical definition of a recession of two consecutive quarters with negative GDP readings. The first quarter saw a decline of 1.6%, and an Atlanta Federal Reserve gauge indicates that the second quarter is about to reach the same figure.

Wall Street, however, sees things a little differently. Although several economists, including those at Bank of America, Deutsche Bank and Nomura, predict a recession in the future, the consensus GDP forecast for the second quarter is a 1% gain, according to Dow Jones.

Whether the recession in the United States will depend primarily on consumers, who accounted for 68% of all economic activity in the first quarter.

Recent indications, however, are that spending fell in the April-June period. Real personal consumption expenditure (after inflation) fell 0.1% in May after rising just 0.2% in the first quarter. In fact, real spending fell in three of the first five months of this year, a product of inflation at its fastest pace in more than 40 years.

It is this inflation factor that currently represents the greatest risk for the American economy.

While President Joe Biden’s administration has touted the recent drop in fuel prices, there are indications that inflation extends beyond gas and groceries.

In fact, the Atlanta Fed’s “sticky” consumer price index, which measures goods whose prices don’t fluctuate much, has been rising at a steady and even somewhat alarming rate.

The one-month annualized Sticky CPI — think personal care products, alcoholic beverages and car care — ran at an annualized pace of 8.1% in June, or at a rate of 5.6% over 12 month. The central bank’s flexible CPI, which includes items such as vehicle prices, gasoline and jewelry, rose at an astonishing 41.5% annualized rate and an 18.7% rate of one year to the next.

An argument from those who hope inflation will recede once the economy returns to higher demand for services rather than goods, easing pressure on overtaxed supply chains, also appears to have flaws. In fact, spending on services accounted for 65% of all consumer spending in the first quarter, down from 69% in 2019, before the pandemic, according to Fed data. So the change was not so remarkable.

If inflation persists at high levels, then this triggers the biggest recession catalyst of all, namely Federal Reserve interest rate hikes which have already totaled 1.5 percentage points and could double before the end of the year. The Federal Open Market Committee responsible for setting rates meets Tuesday and Wednesday and is expected to approve another 0.75 percentage point hike.

The Fed’s monetary tightening is causing concern both on Wall Street, where stocks have been in sell mode for much of 2022, as well as on Main Street, with prices soaring. Business executives are warning that higher prices could drive cuts, including on a jobs situation that has been the main bulwark for those who think a recession is not coming.

Traders expect the Fed to continue to raise its benchmark

Markets took notice and began pricing in a higher risk of recession.

“The more the Fed is prepared to make further big hikes and sharply slow the economy, the more likely the price of controlling inflation will be recession,” Goldman Sachs economists said in a client note. “The persistence of CPI inflation surprises clearly increases these risks, as it worsens the trade-off between growth and inflation, so it makes sense for the market to be more worried about a Fed-induced recession in the the back of higher core inflation impressions.”

On the positive side, the Goldman team said there is a reasonable chance the market has overestimated inflation risks, although it will need to be convinced that prices have peaked.

Financial markets, particularly those for fixed income securities, are still pointing towards recession.

The 2-year Treasury yield surpassed the 10-year note in early July and has remained there ever since. This decision, called the inverted yield curve, has been a reliable recession indicator for decades.

The Fed, however, is taking a closer look at the relationship between 10-year and 3-month yields. This curve has yet to reverse, but at 0.28 percentage points at Friday’s close, the curve is flatter than it has been since the early days of the Covid pandemic in March 2020.

If the Fed continues to tighten, this should push the 3-month rate higher until it eventually breaks above the 10-year rate as growth expectations wane.

“Given the lags between policy tightening and inflation reduction, this also increases the risk of policy tightening too much, just as it contributed to the risks that policy was too slow to tighten when inflation was rising in 2021,” the Goldman team said.

This main bulwark against recession, the labor market, is also faltering.

Weekly jobless claims recently topped 250,000 for the first time since November 2021, a potential sign that layoffs are rising. July’s numbers are traditionally loud due to layoffs at auto factories and the Independence Day holiday, but there are other indicators, such as multiple manufacturing sector surveys, that show hiring is falling.

The Chicago Fed’s national activity index, which incorporates a multitude of numbers, was negative in July for the second month in a row. The Philadelphia Fed’s manufacturing index posted a reading of -12.3, representing the percentage difference between companies reporting expansion versus contraction, which was the lowest number since May 2020.

If the jobs picture does not hold up, and investment slows and consumer spending cools further, there will be little to stand in the way of a full-scale recession.

An old adage on Wall Street is that the job market is usually the last to know it’s a recession, and Bank of America predicts the unemployment rate will hit 4.6% over the next year. .

“In the labor market, we’re basically in a normal recession,” said Hassett, the former Trump administration economist. “The idea that the labor market is tight and the rest of the economy is strong, that’s not really an argument. It’s just an argument that ignores history.”

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