The brutal GDP report released on July 28, which showed the economy had contracted for a second consecutive quarter, prompted some to claim the much-feared recession was already here.
And in a way it makes sense: Since 1948, every period of consecutive negative growth quarters has coincided with a recession.
But the argument that the recession is already here has been seriously undermined since this GDP report was released. A series of events over the past 10 days suggest these recession calls are at least premature.
Yes, the economy is cooling off after last year’s gangbuster growth. But no, it doesn’t appear to be suffering the kind of decline that would qualify as a recession.
Consider the following developments:
- In July alone, the economy created more than half a million jobs.
- The unemployment rate fell to 3.5%, its lowest level since 1969.
- Inflation (in relative terms) cooled off in July for both consumers and producers.
- Gas prices fell below $4 a gallon for the first time since March.
- Consumer sentiment has recovered from record lows.
- The stock market posted its longest weekly winning streak since November.
Mark Zandi, chief economist at Moody’s Analytics, has only grown more confident that the US economy’s recovery is intact.
“This is not a recession. It’s not even in the same universe as a recession,” Zandi told CNN. “It’s just obviously wrong to say it is.”
Zandi said the only thing pointing to a prolonged recession is those consecutive quarters of negative GDP. Still, he predicted that these GDP declines will eventually reverse. And there are leading indicators that GDP will turn positive this quarter.
Of course, this does not mean that the economy is healthy. It is not. Inflation remains far too high.
And none of that means the economy is out of the woods. It is not.
A recession remains a real risk, particularly over the next year and into 2024 as the economy absorbs the full impact of the Federal Reserve’s gargantuan rate hikes. And it remains possible that the economy could stumble so badly in the coming months that economists at the National Bureau of Economic Research, the official arbiter of recessions, finally say a recession started in early 2022. But at the moment it is far too early to say that this is the case.
The labor market is still hot
The biggest problem with claims that a recession has already begun is the fact that hiring ramped up – dramatically – in July. The United States added a staggering 528,000 jobs last month and returned payrolls to pre-Covid levels.
An economy that is in recession does not create half a million jobs in a single month.
“I don’t think anything in the data about where we are in the economy right now is consistent with what we normally think of as a recession,” Brian Deese, director of the White House National Economic Council, told CNN in a phone interview last week.
If anything, the job market is too hot. And that’s a problem for the coming months because it allows the Federal Reserve to raise interest rates aggressively without causing widespread damage to the labor market in its attempt to slow the economy.
The risk is that the Fed will end up slamming on the brakes so hard that it will drag the economy straight into recession.
Inflation is finally cooling down
There is a growing sense that the worst on the inflation front may be over.
The biggest problem of inflation – gasoline prices – is finally easing significantly. The national average for regular gasoline has now fallen more than $1 since hitting a record high of $5.02 a gallon in mid-June.
In addition to gasoline, prices for diesel and aviation fuel are also falling, reducing inflationary pressures on the rest of the economy.
The energy slowdown lowered inflation metrics in July and should do the same, if not more, in August.
The Bureau of Labor Statistics said last week that consumer prices in July were 8.5% higher than a year earlier. While that remains alarmingly high, it is below the 40-year high of 9.1% in June. And month after month the prices hardly changed. Wholesale inflation could also peak. The Producer Price Index, which measures the prices paid to producers for their goods and services, slowed more-than-expected year-on-year in July. And the PPI declined month-on-month for the first time since the economy shut down in April 2020.
Better-than-expected inflation reports reflect not only lower energy prices, but also a reduction in stress in supply chains disrupted by Covid-19.
What a recession would feel like
In a way, the recession debate is semantics.
Recession or no recession, Americans are clearly doing poorly right now because the cost of living is too high. Adjusted for inflation, real wages are falling. And although consumer sentiment, as measured by the University of Michigan, has risen for two straight months, it remains near record lows.
For many, however, an actual recession would be far more painful than today’s environment.
A recession would likely result in the loss of not just hundreds of thousands but millions of jobs. Families unable to make their mortgage payments would face foreclosure on their homes. And small, medium and large companies would perish.
None of these 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 2-year and 10-year government bond yields – remains inverted. And in the past, this has been an incredibly accurate predictor of recessions. It has preceded every recession since 1955.
Overall, recent economic data suggests that the potential recession may have been delayed rather than reversed.
While the risk of a recession appears to have decreased over the next six to nine months, the risk of a recession has increased over the next 12 to 18 months, Zandi said.
“The probability of a recession is still uncomfortably high,” he said.