The US economy did not receive the recession grade

The brutal GDP report released on July 28, which showed the economy had contracted for a second consecutive quarter, led some to insist that the much-feared recession had already arrived.

And in a way this makes sense: since 1948, every period of consecutive quarters of negative growth has coincided with a recession.

But the recession is already here argument has been greatly weakened since the GDP report came out. A series of events in the past 10 days suggest that these recession calls are, to say the least, premature.

Yes, the economy is cooling after last year’s gangbusters growth. But no, it doesn’t seem to be suffering the kind of decline that would qualify as a recession.

Consider the following developments:

The economy added more than half a million jobs in July alone.
The unemployment rate fell to 3.5%, tied for the lowest level since 1969.
Inflation eased (relatively speaking) in July for both consumers and producers.
Gas prices fell below $4 a gallon for the first time since March.
Consumer sentiment has rebounded from historic lows.
The stock market hit its longest weekly winning streak since November.

Mark Zandi, chief economist at Moody’s Analytics, has only become more confident that the US economic recovery is intact.

“This is not a recession. It’s not even in the same universe as a recession,” Zandi told CNN. “It’s patently wrong to say it is.”

Zandi said the only thing that indicates an ongoing recession is those consecutive quarters of negative GDP. However, he predicted that these GDP declines will eventually be revised. And there are early indicators that GDP will turn positive this quarter.

Of course, none of this means the economy is healthy. it is not Inflation remains too high.

And none of this means the economy is out of the woods. it is 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 so much in the coming months that economists at the National Bureau of Economic Research, the official arbiter of recessions, finally declare that a recession began in early 2022. But for now , it’s too early to tell. this is the case.

The job market is still hot

The biggest problem with the argument that a recession has already begun is the fact that hiring increased – dramatically – in July. The United States added 528,000 jobs last month, returning payrolls to pre-Covid levels.

An economy that is in recession does not add half a million jobs in a single month.

“I don’t think any of the data about where we are right now in the economy is consistent with what we normally think of as a recession,” Brian Deese, director of the White House National Economic Council, told CNN in an interview telephone 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 raise interest rates aggressively without causing widespread damage to the labor market in its bid to slow the economy.

The risk is that the Fed ends up tightening so hard that it slows the economy down to a recession.

Inflation is finally cooling down

There is a growing sense that the worst may be over in terms of inflation.

The biggest inflation headache, gas prices, is finally coming down in a big way. The national average for regular gasoline has plunged more than a dollar since hitting a record high of $5.02 a gallon in mid-June.

Beyond gasoline, diesel and jet fuel prices are also falling, easing inflationary pressure on the rest of the economy.

The energy cooling reduced 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 were 8.5% higher in July than a year earlier. While it remains alarmingly high, it is below the 40-year high of 9.1% in June. And, month after month, prices varied little.

Wholesale inflation may also peak. The producer price index, which measures the prices paid to producers for their goods and services, slowed in July more than expected on a year-over-year basis. And the PPI declined month-on-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 reduced stress on supply chains disrupted by Covid-19.

What a recession would feel like

In some ways, the recession debate is semantic.

Recession or not, Americans are clearly suffering right now because the cost of living is too high. Real wages, adjusted for inflation, are reduced. And while consumer sentiment, as measured by the University of Michigan, has risen for two consecutive months, it remains near historic lows.

However, for many, a real recession would be much more painful than the current environment.

A recession would likely involve the loss of not just hundreds of thousands, but millions of jobs. Unable to make mortgage payments, families would face foreclosure on their homes. And small, medium and large companies would fall.

None of these things are happening in a significant way, at least not yet.

But flashing red lights in the bond market suggest that could change.

The yield curve, specifically the gap between 2-year and 10-year Treasury yields, remains inverted. And in the past, this has been an eerily accurate predictor of recessions. It has preceded every recession since 1955.

Taken together, recent economic data suggests that the potential recession may have been delayed, not canceled altogether.

While the risk of a recession in the next six to nine months appears to have gone down, Zandi said, the risk of a recession in the next 12 to 18 months has increased.

“The odds of a recession are still uncomfortably high,” he said.

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