The US economic system has but to face its greatest recession problem

A person removes the nozzle from a pump at a gas station on July 29, 2022 in Arlington, Virginia.

Olivier Douliery | AFP | Getty Images

You would now be hard pressed to find a retreat in the rearview mirror. What’s underneath, however, is another story.

There is no historical precedent to suggest that an economy in recession can produce 528,000 jobs per month, as did the US during July. An unemployment rate of 3.5%, which is tied for the lowest rate since 1969, is not in line with contraction.

But that doesn’t mean a recession isn’t ahead, and, ironically enough, it’s the remarkable resilience of the labor market that may pose the biggest long-term danger to the wider economy. The Federal Reserve is trying to ease pressure on a historically tight jobs situation and its rapid wage gains in an effort to control inflation at its highest level in more than 40 years.

“The reality is that this gives the Fed additional room to continue tightening, even if it raises the likelihood of pushing the economy into a recession,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “It will not be an easy task to continue tightening without negative consequences for the consumer and the economy.”

Indeed, following strong job numbers, including a 5.2% 12-month gain for average hourly earnings, traders stepped up their bets on more aggressive dovishness. As of Friday afternoon, the markets had a 69% chance the central bank would enact its third straight 0.75 percentage point interest rate hike when it meets again in September, according to CME Group data.

So while President Joe Biden celebrated Friday’s big jobs numbers, a much more unpleasant data point could be on the way next week. The consumer price index, the most widely followed measure of inflation, comes out on Wednesday and is expected to show continued upward pressure even with a sharp drop in gasoline prices in July.

That will complicate the central bank’s balancing act of using rate hikes to moderate inflation without pushing the economy into recession. As Rick Rieder, chief global fixed income investment officer at asset management giant BlackRock, said, the challenge is “how to execute a ‘soft landing’ when the economy is coming in hot, and it’s landing on a runway that’s never been used before this..”

“Today’s print, coming in much stronger than expected, supports a Federal Reserve position that seeks to engineer a more moderate employment environment, consistent with its efforts to moderate current inflation levels,” Rieder said in client note. “However, the question now is how much longer (and higher rates) will it take before inflation can be brought under control?”

More signs of recession

Financial markets have bet against the Fed in other ways.

The 2-year Treasury note inflow surpassed the 10-year note by the highest margin in about 22 years on Friday afternoon. That phenomenon, known as an inverted yield curve, is a sign of a recession especially when it continues for a long period of time. In this case, the inversion is in effect from the beginning of July.

But that doesn’t mean a recession is imminent, just that it’s likely in the next year or two. While that means the central bank has some time, it could also mean it won’t have the luxury of slow hikes but instead will have to continue moving quickly – a scenario many had hoped for. to avoid policy making.

“It’s certainly not my bottom line, but I think we might hear some talk of an intersession hike, unless the next batch of inflation reports is hot,” said Liz Ann Sonders, chief strategist investment by Charles. Schwab.

Sonders called the current situation a “unique cycle” in which demand is shifting back to services from goods and creating numerous challenges for the economy, which would put an end to the debate. whether the US is in recession which is not as important as what lies ahead.

That’s a view widely shared by economists, who fear the hardest part of the journey is yet to come.

“Although economic output has declined for two consecutive quarters in the first half of 2022, a strong labor market means that we are unlikely to experience a recession right now,” said Frank Steemers, senior economist at the Conference Board. “However, economic activity is expected to cool further towards the end of the year and it is becoming increasingly likely that the US economy will fall into recession before the end of the year or in early 2023.”

Leave a Comment