Recession or Not, Economy is Slowing

After the Fed raised short term interest rates by 0.75 percent to a range of 2.25-2.50 percent, Chairman Jerome Powell said that the U.S. is not currently in a recession, which he describes as a “broad based decline” and then added, “that’s not what we have now.” Powell noted that it’s hard to square a recession with the still-solid labor market. Over the first six months of the year, we have created 2.74 million jobs, the unemployment rate remains near 50-year lows at 3.6 percent and there are more than 11 million job openings.

Indeed, the NBER Business Cycle Dating Committee, which is responsible for determining the beginning and end of recessions, analyzes a lot of different indicators to make a recession call, which usually happens after the fact. Perhaps the slowdown will morph into a recession and impact the labor market, though that is not what is expected for the July Employment report, due August 5th. The consensus estimate is for the pace of job creation to continue to taper off to 250,000 jobs, which according to Michael Pearce of Capital Economics, “would be consistent with an economy which is slowing, but not in recession. At that pace, the unemployment rate would probably remain unchanged at 3.6 percent, as it has done since March.”

Meanwhile, recession talk is rampant, especially after the release the Gross Domestic Product (GDP), which measures the total value of goods and services produced in the U.S. The GDP reading for the second quarter found the economy is shrinking at an annual pace of 0.9 percent, as consumers and businesses pulled back on spending amid high prices. On the heels of a negative first quarter, the report is amplifying fears of a recession.

Whether or not NBER officially makes the recession call, it’s becoming obvious that a slowdown from last year’s growth of 5.7 percent (the fastest GDP since 1984) has begun, and that a lot of Americans are struggling to make ends meet amid high inflation. Economists believe that prices have probably peaked, but the pressures that have built up will remain in the system, which means the Fed is likely to keep hiking rates at the three remaining policy meetings of 2022. The size and timing of increases will be data dependent, though most economists believe that the benchmark lending rate will rise by another full percentage point to 3.5 percent by the end of the year. To put that in perspective, rates were ZERO until March of this year and in November 1981, when inflation was last this high, the Fed Funds rate stood at 13.3 percent.