Economic data in the United States sends mixed messages, complicating the answer to a seemingly simple question: Is the world’s largest economy in recession?
Commerce Department figures Thursday showing a second consecutive quarter of declines in gross domestic product intensified what has become a politically charged debate.
News of the second straight decline – a common marker of a recession – followed signs that business activity across the country was beginning to slow. The U.S. housing market is reeling and consumers are depressed as the Federal Reserve steps up its efforts to rein in the highest inflation in more than four decades with steep interest rate hikes.
The official arbiters of whether the US is in recession or not – a group of economists from the National Bureau of Economic Research – have yet to issue their formal judgment.
But White House policymakers have already done theirs.
Ahead of Thursday’s report, Treasury Secretary Janet Yellen said she would be “surprised” if the NBER declared the current moment a recession. She doubled down on that view at a news conference after the data was released, noting that the substantial job losses, business closures and stretched budgets that typically accompany a recession are “not what we let’s see right now”.
The same goes for the Fed. Jay Powell, the central bank’s chairman, warned on Wednesday that GDP numbers are revised multiple times and that the first iteration should be taken “with a grain of salt.”
Yet Republicans seized on Thursday’s data, immediately mark it “Joe Biden’s Recession”.
Those who have embraced the idea that the United States is in a recession point to the fact that whenever there have been back-to-back contractions in GDP in the past, a recession is – more often than not – ultimately called by the NBER.
“The ‘official’ definition of recession is not consecutive quarters of negative real GDP,” said David Rosenberg, chief economist and president of Rosenberg Research. “But whenever that happened in the post-war period, the economy turned out to be in recession.”
Most economists share the view of the White House and the Fed that the United States is not yet in recession, but their confidence that the economy can avoid an outcome at a later date has markedly decreases.
“Based on GDP data alone, we cannot conclude that we are currently in a recession,” said Blerina Uruçi, US economist at T Rowe Price. “This could be the prelude to a recession. . . And we have to be careful not to overlook anything at the moment, because there is so much uncertainty. »
The NBER characterizes one as a “significant decline in economic activity that spans the entire economy and lasts for more than a few months.”
The organization’s committee of eight economists meets in closed meetings to make that decision, usually with a lag of several months or a year. The judgment is based on measures such as monthly employment growth, consumer spending on goods and services and industrial production.
By those standards, the current economic environment unequivocally falls short of that threshold, Fed and White House officials say.
Last month, the economy added 372,000 healthy jobs and the unemployment rate stabilized at a historic low of 3.6%. For every unemployed person, there are about two vacancies, making it one of the tightest labor markets in recent history.
“We have never had a recession without layoffs, [and] I don’t think we are close to a full cycle of layoffs. There’s just no evidence of that,” said Aneta Markowska, chief financial economist at Jefferies.
Economists point to the Sahm rule. Developed by former Fed worker Claudia Sahm, the rule states that a recession takes root when the three-month moving average of the jobless rate rises at least half a percentage point above its trough. last 12 months. According to this measure, the unemployment rate would have had to exceed 4% to say that the United States is in recession.
The GDP data, however, included signs of weakness beyond the headline figure which suggests much less buoyant consumption and sluggish investment. Citigroup economists went so far as to say that mid-2022 could mark a peak in activity.
“This is a pretty broad-based slowdown in spending,” added Jonathan Millar, a former Fed economist now at Barclays. While he pushed back against the idea that the US economy would soon tip into a recession, he said there was a “very strong possibility” that this could happen next year and that it “really depends on the resilience of the service sector”.
The U.S. central bank is expected to continue its plans to tighten monetary policy even as the economy slows, after raising interest rates by 0.75 percentage points this week for the second consecutive meeting. Powell announced further hikes to come and market participants expect the benchmark key rate to reach around 3.5% by the end of the year, a full percentage point above the current level.
The Fed Chairman has argued that rate hikes can lower inflation without causing painful job losses or a sharp slowdown, but again conceded this week that the path to that outcome has been “clearly narrowed.” “. . . and can shrink further.
He also claimed that the central bank remains strictly focused on tackling high inflation and that failure to do so would be a worse outcome than over-stressing the economy, heightening worries about a possible recession.
“That’s what happens in an environment where the Fed is trying to make its policy restrictive,” said Andrew Patterson, senior international economist at Vanguard. “You’re going to start seeing worsening output and possibly rising unemployment in an effort to try to bring inflation down.”
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