DANGER AHEAD: THE US ECONOMY FACES ITS BIGGEST RECESSIONARY CHALLENGE YET
Finding recession in the rearview mirror will be difficult now. However, what happens down the road is another story.
There is no historical precedent indicating that a recession-prone US economy could add 528,000 jobs in a single month, as the US did during July. The unemployment rate of 3.5%, the lowest level since 1969, is not consistent with a contraction.
But that doesn’t mean a recession isn’t ahead, and ironically, it’s the extraordinary elasticity of the labor market that may pose the biggest long-term threat to the broader economy. The Federal Reserve is trying to ease pressure on historically tight employment conditions and its rapid wage growth in an effort to rein in inflation is at a more than 40-year high.
“The reality is that this gives the Fed more room to tighten even as it increases the chances of pushing the economy into a recession,” said Jim Baird, chief investment officer at Plant Moran Financial Advisors. “Continuing the tightening without negative impacts on consumers and the US economy will not be an easy task.”
Indeed, on the back of strong jobs numbers, which included a 5.2% 12-month rise in average hourly earnings, traders increased their bets on a more hawkish Federal Reserve. As of Friday afternoon, markets pegged around a 69 percent chance the central bank will raise interest rates for the third straight time by 0.75 percentage points when it meets again in September, according to CME Data Group.
So while President Joe Biden celebrated Friday’s big jobs numbers, next week could be a much more negative data point. The Consumer Price Index, the most closely followed measure of inflation, is released on Wednesday and is expected to continue upward pressure despite a sharp drop in gasoline prices in July.
This would complicate the central bank’s balancing act of using rate hikes to reduce inflation without tipping the economy into recession. As Rick Ryder, chief investment officer of global fixed income at asset management giant BlackRock, said, “The challenge is to ‘soft-land’ when the economy is heating up and you’re landing on the runway.” How to implement is used first.” ”
“Today’s stronger-than-expected print complicates the Federal Reserve’s task of creating a more benign operating environment, given current levels of inflation,” Ryder said in a note to clients. It is in line with efforts to moderate it.” “However, the question now is how long (and higher) rates will have to go before inflation is brought under control.”
More Signs Of Recession
Financial markets were betting against the Fed in other ways.
The yield on the 2-year Treasury note rose above the 10-year note. By the largest margin in nearly 22 years on Friday afternoon. That trend, known as an inverted yield curve, has been a clear sign of a recession, especially when it lasts for a long time. In the present case, the investment is effective from the beginning of July.
But that doesn’t mean a recession is imminent, just that it’s likely to happen 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 a slower rate hike. But instead will have to move faster, a situation policymakers have warned against. Was hoping to avoid.
“It’s certainly not my primary concern. But I think we could start to hear some talk of a hike between meetings. But only if the next batch of inflation reports is hot,” Charles said. said Liz Ann Saunders. Chief investment strategist at Schwab.
Saunders called the current situation “a unique cycle” in which demand for goods is returning to services. And creating a number of challenges for the US economy. Sparking debate over whether the United States is in a recession. Less important. What’s coming now? .
It’s A View Widely Shared By Economists, Who Fear The Hardest Part Of The Journey Is Yet To Come
“While economic output contracted for two consecutive quarters in the first half of 2022. A strong job market means we may not be in a recession yet”. Said Frank Stammers, senior economist at the Conference Board. However, economic activity is expected to cool further towards. The end of the year and it is highly likely that the US economy. Will enter a recession before the end of the year. or early 2023.
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