EYE ON THE ECONOMY
T he headline question for the U.S. economy is, have we entered a recession? Data printed on July 28 indicated that one metric of the economy, the estimate of second quarter gross domestic product (GDP), was in recessionary territory. Following a first quarter decline in GDP of 0.4 percent, the U.S. economy contracted again slightly in the second quarter, a 0.2 percent drop according to the Bureau of Economic Analysis (BEA). As additional data is analyzed through September, it is possible that second quarter GDP could tip in the opposite direction. The variance between the advance and final estimates is typically 20 or 30 basis points, so the reading of decline could change. Moreover, the assessment of an economic recession rests on more than GDP, as Fed Chair Jerome Powell emphasized in his comments following the meeting of the Federal Open Markets Committee on July 27. The strength of the labor markets
is in recession – watches continue to show growth. During the second quarter, industrial production, nonfarm payroll employment, income-less-transfers, and personal consumption expenditures all grew. The latter is especially important since the consumer will likely be the determining factor in whether there will be recession. Coming into the third quarter of 2022, consumer sentiment fell to levels unseen since the Great Recession. That is not unexpected. Nearly two decades have passed since interest rates rose as quickly as during the second quarter. Thus far, however, consumers have continued to spend, shifting more of their income to services from goods. JLL’s chief economist, Ryan Severino, described the environment in which consumers tend to make economic observations in a June 14 blog post on inflation, noting that the dour mood of consumers did not match the overall state of the economy. “Consumers are not running models, carefully balancing positives and negatives. Set in an ocean of click-bait headlines and sophomoric analysis, consumers find themselves on small analytical life rafts,” Severino wrote. Severino’s point about the overall economy was made in comparison to recent low points, such as the financial crisis in 2008 and the COVID-19 shutdowns in March 2020. The data on the economy supports his contention. For example, continuing claims for unemployment compensation just reached 1.4 million during the latter weeks of July 2022. That was one-third the number of claims in July 2021 and 400,000 fewer claims than in spring 2019. Where the rubber hits the road, of course, is in how the consumer behaves. How much is the consumer spending; and how much is inflation suppressing personal consumption?
– above average job creation, near record low unemployment, and twice as many openings as unemployed persons – remains a bulwark against real recession. Few economists forecasted a recession by mid-2022 but most have now moved on from the probability of a soft landing from the Fed’s rate hikes and balance sheet reductions (which have the effect of a long-term rate hike by reducing liquidity). This shift came as the Fed made it clear that suffocating inflation was a higher priority than preventing inflation especially after the 75-basis point hikes in June and July. With a strong labor market making a severe downturn unlikely, the prevailing economic outlook is for a mild recession sometime between fourth quarter 2022 and mid-2023. There are still indications that a slowdown without recession can be achieved. Four of the factors that the National Bureau of Economic Research – the agency that officially determines when the economy
According to the BEA, real personal consumption in the first quarter of 2022
Continuing unemployment claims fell to 1.3 million by the end of the second quarter. Source: Bureau of Labor Statistics.
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