The brutal GDP report released on July 28, showing the economy had contracted for the second quarter in a row, led some to insist that the dreaded recession had already arrived.
And in a way it makes sense: since 1948, every period of successive quarters of negative growth has coincided with a recession.
But the recession-is-already-here argument has been severely undermined since that GDP report came out. A series of events over the past 10 days suggests those recession calls are premature, to say the least.
Yes, the economy is cooling after the growth of last year’s gangbusters. But no, it doesn’t seem to be undergoing the kind of downfall that would be classed as a recession.
Consider the following developments:
- 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 cooled (relatively speaking) in July for both consumers and producers.
- Gasoline prices fell below $4 a gallon for the first time since March.
- Consumer confidence has returned from record lows.
- The stock market recorded its longest weekly streak since November.
Mark Zandi, chief economist at Moody’s Analytics, has only grown more confident that the US economic recovery is intact.
“This isn’t a recession. It’s not even in the same universe as a recession,” Zandi told CNN. “It’s just plain wrong to say it is.”
Zandi said the only thing that points to an ongoing recession are consecutive quarters of negative GDP. Still, he predicted that those GDP declines will eventually be reversed. And there are early indicators that GDP will turn positive this quarter.
Of course, all this does not mean that the economy is healthy. It’s not. Inflation remains much too high.
And all this does not mean that the economy is out of trouble. It’s 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 monstrous rate hikes.
And it remains possible that the economy will stumble in the coming months so much that economists at the National Bureau of Economic Research, the official arbiter of recessions, eventually declare that a recession started in early 2022. But for now it’s way too early to say that’s the case.
Labor market is still hot
The biggest problem with arguing that a recession has already started is the dramatic increase in hiring in July. The United States added a whopping 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 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 statement. phone interview last week.
If anything, the job market is too hot. And that’s a problem for the coming months, as it allows the Federal Reserve to aggressively raise interest rates without causing widespread damage to the labor market in its attempt to slow the economy.
The risk is that the Fed will eventually hit the brakes so hard that it will slow the economy into recession.
Inflation is finally cooling down
There is a growing sense that perhaps the worst is over on the inflation front.
The biggest headache of inflation — gasoline prices — is finally being alleviated in a big way. The national average for regular gasoline is now down more than $1 since hitting a record high of $5.02 per gallon in mid-June.
In addition to gasoline, the prices of diesel and jet fuel are also falling, reducing inflationary pressures on the rest of the economy.
The energy cooldown cut inflation rates 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 a year earlier. While that remains alarmingly high, it is below a 40-year high of 9.1% in June. And month after month, prices had changed little.
Wholesale inflation may also spike. The producer price index, which measures prices paid to producers for their goods and services, slowed more than expected year on year in July. And the PPI fell month over month for the first time since the economy shut down in April 2020.
The better-than-expected inflation reports reflect not only lower energy prices, but also alleviation of stress in supply chains distorted by Covid-19.
What would a recession feel like?
In some ways, the recession debate is semantics.
Recession or not, Americans are clearly in pain right now because the cost of living is too high. Real wages, adjusted for inflation, are contracting. And while consumer confidence, as measured by the University of Michigan, has risen for two months in a row, it remains close to record lows.
For many, however, an actual recession would be far more painful than the current environment.
A recession would likely result in the loss of not only hundreds of thousands but also millions of jobs. Unable to make their mortgage payments, families would face foreclosure on their homes. And small, medium and large companies would go under.
None of those things are happening in any significant way, at least not yet.
But flashing red lights in the bond market suggest that could be changing.
The yield curve – specifically the gap between yields on 2- and 10-year government bonds – remains inverted. And in the past, this has been an eerily accurate predictor of recessions. It has preceded every recession since 1955.
All in all, recent economic data suggests that the potential recession may have been delayed and not canceled altogether.
While the risk of a recession appears to have decreased in the next six to nine months, Zandi said the risk of a recession in the next 12 to 18 months has increased.
“The chances of a recession are still uncomfortably high,” he said.