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Recession Debate Shifting to Question of When, not if

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Recession Debate Shifting to Question of When, not if

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

But the future is not so clear.

While GDP contracted for two consecutive quarters, including a 0.9% decline in the second quarter, the Atlanta Fed now estimates that GDP will grow 2.1% in the third quarter.

Atlanta Fed President Rafael Bostic said the U.S. economy is “moving away from recession,” noting that recession fears “may be self-fulfilling.”

Bostic told NPR on Friday that the strength of job growth is encouraging and shows “momentum” in the economy. “There’s a lot of demand there, so I think we’re still a long way from a recession.”

His sentiment mirrored comments from Federal Reserve Chairman Jerome Powell after the Fed raised interest rates by 0.75% on July 28.

As part of efforts to lower inflation, he said, “we are not trying to get into a recession, and we don’t think it is necessary”. “I don’t think the U.S. is in a recession right now because there are so many sectors of the economy — you know, they’re doing too well.”

GDP is not just an economic indicator

The current data has led to mixed results as job growth remains strong, but high inflation is eating into wages, Mark Hamrick, senior economist at New York-based financial data firm Bankrate, told TheStreet.

Using GDP as the benchmark for determining whether the economy is in recession is no longer the “one-size-fits-all” measure of economic health, he said.

Even with the quarterly GDP reading in negative territory, there is a “clear disconnect” between current job market conditions and the 3.6 percent unemployment rate, Hamrick said.

While job gains have been “impressive year-to-date,” he said, even as new jobless claims were trending up, they were trending down.

Hamrick said that while GDP estimates for the third and fourth quarters were positive, “there is a general recognition that risks to the U.S. economy have risen and are high.” The most recent Bankrate quarterly survey of economists put the chance of a recession essentially 1 in 2 by the end of 2023.

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

“It’s entirely possible that we felt like we were in a recession before the National Bureau of Economic Research declared a recession,” he said. “The economy is sending mixed messages, and that’s what makes it so difficult. The stock market has gotten hooked on the idea that the Fed will eventually stop raising rates and start cutting rates early next year.”

Wall Street says economy not in recession

Bank of America said the ongoing debate on the economy was just a “distraction” because “a soaring payroll, strong gross domestic income and strong final sales all suggest that a ‘recession’ remains a forecast, not a reality.”

JPMorgan Chase echoed a similar sentiment, saying: “…we don’t think the U.S. will slip into a recession earlier this year, as nonfarm payrolls rose an average of 375,000 a month in the second quarter. “

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The investment bank did say it was concerned about job losses given the recent surge in initial jobless claims. It said that if the average increased to 275,000 this quarter, it “would be a strong signal that the U.S. is entering a recession.”

However, former JPMorgan economist Anthony Chen said the third-quarter GDP growth forecast was “another reason to justify the view that the U.S. economy is not in recession right now.”

“Typically, the U.S. is entering a recession when job growth typically grows at 2.0 percent a year or less,” he said.

Institutional and household surveys both show an annual growth rate of more than 4 percent.

“This does not mean that the U.S. is currently in the middle or entering a recession,” Chen said.

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

“Right now, the economic backdrop doesn’t support the idea that we’re in a recession right now,” he said.

Ernst & Young chief economist Gregory Daco said the persistent “pointless and unhealthy recessionary distress” had been resolved.

He said the economy was “undeniably cooling”, with GDP growth falling from 3.5% year-on-year in the first quarter to 1.6% in the second quarter.

“Continued drags from rising inflation, a significantly more hawkish Federal Reserve, tightening financial conditions and a deteriorating global economic backdrop will continue to weigh on housing activity, consumer spending, business investment and trade,” Darko said.

The U.S. will enter a recession starting in the fall, he said, because while GDP growth will rebound in the third quarter, it will contract in the fourth and first quarters of 2023, averaging 1.6% in 2022 and just 0.7% in 2023. . Unemployment will rise to over 4% in early 2023. .

consumers feel pressure

Despite higher spending, consumer confidence fell. The Michigan consumer sentiment survey showed a slight increase in July, but the reading was near an all-time low.

Survey director Joanne Hsu said the one-year outlook also fell to its lowest level since 2009, even as concerns about global factors eased.

Higher inflation has crippled consumers’ budgets with skyrocketing interest rates on food, gas, rent, mortgages and credit cards.

Americans’ savings rate has also fallen recently, from 5.5% in May to 5.1% in June, the lowest level since August 2009.

Even if inflation is at its highest level in more than 40 years, consumer spending is surging, Wells Fargo Securities senior economists Tim Quinlan and Wells Fargo Securities economists Shannon Seeley wrote in a July 29 research note. still increasing.

The increase in spending “has taken a toll because consumers have not had to cut their savings rate so low since 2009,” Quinlan and Seery wrote.

Income doesn’t keep up with inflation, and households spend more simply because they’re not saving.

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

“The exact timing of the recession depends on many variables, but how the demand environment evolves is certainly an important component,” Quinlan and Seeri said. “Today’s spending comes at the cost of deteriorating household balance sheets, and the longer it goes on, the greater the risk to household financial health.”

Hamrick said the economy has not yet “handled or reacted to this year’s aggressive rate hike strategy.”

“At the end of the day, the only salvation for the U.S. economy will be to actually get rid of inflation,” he said. “And that day of redemption still seems to be going well in the future.”

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