The recession debate shifts to the question of when, not if

Despite a heated political debate that attracted Elon Musk, economists, the Federal Reserve and Wall Street overwhelmingly agree that current economic data does not show the United States is in a recession.

But the future is not so clear.

Even though GDP has contracted for two straight quarters, including a 0.9% drop in the second quarter, the Atlanta Federal Reserve now estimates that GDP will grow 2.1% in the third quarter.

Atlanta Fed Chairman Raphael Bostic said the U.S. economy is “away from a recession” and noted that recession fears “could become self-fulfilling.”

The strength of job growth is encouraging, demonstrating “momentum” in the economy, Bostic told National Public Radio on Friday. “There’s a lot of demand there, so I think we’re a long way from a recession.”

His sentiment mirrors comments from Fed Chairman Jerome Powell after the central bank raised rates by 0.75% on July 28.

“We’re not trying to have a recession, and we don’t think we have to” as part of the effort to reduce inflation, he said. “I don’t think the United States is currently in a recession, and the reason for that is that there are just too many sectors of the economy that are working, you know, too well.”

GDP is not just an economic indicator

Current data has shown mixed results as job growth remains strong, but high inflation is trickling down to wages, said Mark Hamrick, senior economic analyst at Bankrate, a New York-based financial data firm, at TheStreet.

Using GDP as a benchmark for determining whether an economy has fallen into a recession is no longer the “all and end all” about the potential health of the economy, he said.

There has been an “apparent disconnect” between the current labor market situation and the unemployment rate at 3.6%, even when quarterly GDP readings have been in the minus column, Hamrick said.

While job gains have been “impressive year-to-date,” they are trending downward even as new jobless claims are on an upward trajectory, he said.

While GDP was estimated positive in the third and fourth quarters, it is “widely recognized that the risks to the US economy have increased and are elevated,” Hamrick said. The recent Bankrate Quarterly Survey of Economists put the odds of a recession at essentially 1 in 2 through the end of 2023.

While using two consecutive quarters of GDP growth is a reasonable shortcut, “it lacks context,” said Steve Sosnick, chief strategist at Interactive Brokers, a brokerage firm based in Greenwich, Connecticut. at TheStreet.

“It’s entirely possible that we could feel we’re in a recession long before the National Bureau of Economic Research declares one,” he said. “The economy sends mixed messages and that’s what makes it so difficult. The stock market has fallen in love with the idea that the Fed will eventually stop raising rates and start cutting them early next year.

Wall Street says the economy is not in a recession

Bank of America said the ongoing debate over the economy is just a “distraction” because “roaring payrolls, high gross domestic income and high final sales suggest the ‘recession’ is still a forecast, not a reality”.

JPMorgan Chase echoed a similar view, saying: “…we don’t think the U.S. entered a recession earlier this year, given that nonfarm payroll growth has been in average of 375,000 per month during Q2.”

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The investment bank said it was concerned about unemployment given the recent large increase in initial jobless claims. He said if the level increased to an average of 275,000 this quarter, it “would be a strong signal that the United States has entered a recession.”

However, the third-quarter GDP growth estimate is another reason to “justify the view that the US economy is not in recession at the moment,” said former JP Morgan economist Anthony Chan. Chase.

“Typically, the United States enters a recession when job growth typically increases by 2.0% or less as an annual percentage,” he said.

The establishment survey and the household survey show growth above 4% on an annual percentage basis.

“That doesn’t mean the United States is in the middle of or going into a recession right now,” Chan said.

Wall Street and investors should be prepared for slower economic growth and corporate earnings and a 65% chance of a mild recession over the next 12 months, he said.

“At the moment, the economic context does not suggest that we are currently in a recession,” he said.

“The insane and unhealthy obsession with recession” has been resolved, said Gregory Daco, chief economist at Ernst & Young.

The economy is “undeniably cooling down” with GDP growth dropping from 3.5% year-on-year in the first quarter to 1.6% year-on-year in the second quarter, he said.

“The lingering drag from higher inflation, a decidedly more hawkish Fed, tighter financial conditions and a deteriorating global economic backdrop will continue to weigh on real estate activity, consumer spending, business investment and the trade,” Daco said.

The United States will enter a recession from the fall because although GDP growth will rebound in the third quarter, it will contract in the fourth quarter and the first quarter of 2023, averaging 1.6% in 2022 and only 0.7% in 2023, he said. . The unemployment rate will increase and exceed 4% at the start of 2023.

Consumers feel the pinch

Consumer confidence has fallen even as spending has increased. Michigan’s consumer sentiment survey showed a slight increase in July, but the reading is near its lowest level on record.

The one-year outlook also fell to its lowest level since 2009, although concerns about global factors have waned, said survey director Joanne Hsu.

Higher inflation rates have put a significant dent in consumer budgets with soaring prices for food, gasoline, rent and mortgage rates, and credit cards.

American savings rates have also fallen recently and fell to 5.1% in June from 5.5% in May, the lowest level since August 2009.

Consumers are still spending more, even with inflation rates at their highest levels in more than 40 years, senior economist Tim Quinlan and Wells Fargo Securities economist Shannon Seery wrote in a July 29 research note.

The increased spending “is taking its toll as consumers haven’t had to cut their savings rate this low since 2009,” Quinlan and Seery wrote.

Incomes are not keeping up with inflation rates and households are spending more only because they are not saving money.

Wells Fargo also estimates that a recession will begin early next year.

“The exact timing of the recession depends on a number of variables, but how the demand environment evolves is certainly an important consideration,” Quinlan and Seery said. “Today’s spending comes at the cost of deteriorating household balance sheets, and the longer it lasts, the more risk it poses to household financial health.”

The economy has yet to “deal with or react to this year’s aggressive rate hike tactics,” Hamrick said.

“At the end of the day, the only salvation for the US economy would be real relief from inflation,” he said. “And the day of this salvation seems to remain well in the future.”

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