The US economy is not currently in a recession. No, two quarters of negative growth, whatever you’ve heard, is not the “official” or “technical” definition of a recession; that is determination made by a committee which is always based on different indicators, in particular job growth. And as Jerome Powell, the chairman of the Federal Reserve, noted yesterday the labor market still looked strong.
That said, the US economy is definitely slowing, mainly because the Fed is deliberately manipulating a slowdown to lower inflation. And it’s possible that this delay will eventually be severe and wide enough to receive the R label. In fact, I think I’m a little more pessimistic than the consensus on this question; I think the odds are at least 50-50 that history will say we experienced a mild recession in late 2022 or early 2023, a recession that caused a modest rise in unemployment. But what’s in a name?
The real question is whether a moderate slowdown, whether it’s called a recession or not, will be enough to keep inflation in check. And the news on that front has been pretty encouraging lately.
Clear gasoline prices have fallen — nearly 80 cents a gallon from their mid-June peak. (Remember those scary stories about $6 a gallon in August?) More importantly, corporate surveys — which often pick up economic turning points long before official statistics — are beginning to point to a significant decline in broader inflation. For example, a survey by S&P Worldwide found that while private sector companies are still raising prices, inflation “has now fallen to a 16-month low.”
The financial markets have noticed. The expected price increase in the coming year implied by inflation swap markets (don’t ask) fell from more than 5 percent in early June to 2.45 percent as of Thursday morning. Medium-term inflation expectations are also down.
Now it is much, much 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’s plenty of room to debate the level of ‘underlying’ inflation – a vaguely defined term, but roughly the part of inflation that’s hard to get down once it’s gone higher.
Serious economists I speak to are very curious about Friday’s release of the Employment Cost Index, which is supposed to measure what happens to employment costs. Will it confirm or contradict the apparent? slowdown in wage growth visible in simple measurements of average wages and at least one influential questionnaire?
Well, we’ll have to wait and see. The good news is that policymakers seem willing to do so. In my opinion, the most encouraging aspect of the Fed is: pronunciation on Wednesday, 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 willing to adjust the stance of monetary policy as necessary.” to fit”. That’s not too subtle a rejection of the demands of inflation hawks that the Fed is now committing to a long period of extremely tight money.
As I suggested, there is early evidence that the Fed is winning its inflation war, faster and easier than most observers expected. What does it mean when these early omens come true?
The big answer, I would suggest, is that we need to re-evaluate recent economic policies. As everyone should know (although many probably don’t), the US economy has been remarkably successful in restoring jobs lost during the pandemic slump. This good news was overshadowed by high inflation, leading to many statements that US economic policy was all wrong.
But much of the recent inflation reflects global forces beyond the control of the US, which is why inflation has risen almost everywhere, not just here. And if the portion of excess inflation reflecting US policies can be settled fairly quickly, at no great expense, an honest reading of the record would say the policy was, in fact, very successful — that a temporary rise in inflation was a price. worth paying to avoid the kind prolonged depressed economy we experienced after the 2008 financial crisis.
That said, it seemed for a while that a wave of inflation through the political process had caused lasting, even catastrophic, damage as it undermined the prospects for meaningful action on climate change. An episode of high inflation is not the end of the world; not acting on climate could well be that.
But Wednesday (!) Senator Joe Manchin spoke out convinced that a bill to tackle climate change will actually reduce inflation. (It will.) While I’m not ready to count my chickens until they’re formally signed in the Oval Office, it now looks like we’ll have both a speedy recovery and much-needed investment in America’s future.
So while the preliminary GDP figure (which is likely to be) heavily revised) was negative, general economic news looks fairly positive.