The US economy is not currently in a recession. No, two quarters of negative growth is not, whatever you may have heard, the “official” or “technical” definition of a recession; this determination is made by a committee which has always relied on various indicators, in particular employment growth. And like Jerome Powell, the chairman of the Federal Reserve, noticed yesterday, the job market still looks strong.
That said, the US economy is definitely slowing down, basically because the Fed is deliberately planning a slowdown to reduce inflation. And it’s possible that this slowdown will eventually be severe and large enough to get the R label. In fact, I think I’m a little more pessimistic about this question than consensus; I think the odds are at least 50-50 that history will say we experienced a mild recession in late 2022 or early 2023, which caused a modest rise in the unemployment rate. But what’s in a name?
The real question is whether a moderate slowdown, called a recession or not, will be enough to control inflation. And the news on that front has been pretty encouraging lately.
Of course, gasoline prices are falling – nearly 80 cents a gallon since the mid-June peak. (Remember those scary stories about $ 6 a gallon by August?) More importantly, business surveys – which often pick up economic turning points well before official statistics – are starting to suggest a significant drop in broader inflation. For example, an S&P Global survey found that while private sector companies are still raising prices, the inflation rate has “now fallen to a 16-month low.”
The financial markets have noticed this. The expected rate of price increase for next year implied by the inflation swap markets (don’t ask) plunged from more than 5% in early June to 2.45% on Thursday morning. Medium-term inflation expectations also fell.
Now, it is too, too early to declare victory in the fight against inflation. There have been several false dawns on that front over the past year and a half. And there is plenty of room to discuss the “underlying” level of inflation – a loosely defined term, but roughly the part of inflation that is difficult to bring down once it gets high.
The serious economists I speak to are very eager to see the release of the Employment Cost Index on Friday, which should measure what’s going on, ahem, labor costs. Will confirm or contradict the apparent slowdown in wage growth visible in simple measures of average wages and at least one influential investigation?
Well, we’ll have to wait and see. The good news is that politicians seem willing to do just that. From my perspective, the most encouraging aspect of Wednesday’s Fed statement was the paragraph stating that the monetary policy-setting committee is willing to be flexible, that it “will continue to monitor the implications of incoming information. “and“ would be prepared to adjust the monetary policy stance appropriately. ”This is a not-too-subtle rejection of the inflation hawks’ claims that the Fed is committing now now to a long period of extremely limited money.
As I have suggested, the first indications are that the Fed is winning its war on inflation, and it is doing it faster and easier than most observers expected. What will it mean if these early omens are confirmed?
The big answer, I would suggest, is that we will have to reevaluate recent economic policy. As everyone should know (although many probably don’t know), the US economy has been remarkably successful in restoring the jobs lost during the pandemic crisis. This good news has been overshadowed by high inflation, which has led to many claims that US economic policy has it all wrong.
But much of the recent inflation reflects global forces beyond US control, which is why inflation has risen almost everywhere, not just here. And if the portion of excess inflation that reflects US policy can be liquidated quickly enough, without high cost, a correct reading of the documentation would say that the policy was indeed very successful: that a temporary increase in inflation was a price worth it. worth paying to avoid the kind of long-term depressed economy we experienced after the 2008 financial crisis.
That said, for a while it appeared that a wave of inflation had caused permanent, even catastrophic, damage through the political process, because it had undermined the prospects for meaningful action on climate change. An episode of high inflation is not the end of the world; the inability to act on the climate could very well be.
But on Wednesday (!) Senator Joe Manchin said he was convinced that a climate change bill will actually reduce inflation. (It will.) While I’m not ready to count my chickens until they’re formally signed into the Oval Office, right now it looks like we’re going to have both a quick recovery and a desperately needed investment in future America.
So while the preliminary number for GDP (which probably will be heavily revised) was negative, from where I sit the overall economic news looks quite positive.