Is The U.S. In Recession? Why This Isn't Your Usual Economic Slowdown

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Summary

  • When a recession isn't really a recession.
  • How the job market has remained strong, despite economic headwinds.
  • Is an economic soft landing still possible?

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The U.S. economy has experienced two consecutive quarters of negative growth. Even so, there is doubt about whether the world’s largest economy has actually entered a recession. Anthony Okolie speaks with Thomas Feltmate, Senior Economist at TD Bank, about the positive indicators he’s seeing.

Transcript

Anthony Okolie: Markets are mixed today as investors await Friday's US jobs report. And while the labor market has shown strength, two quarters in a row of negative GDP growth have some asking whether the world's largest economy is already in a recession or about to enter one. Well, joining us now for his take is Thomas Feltmate. He's a Senior Economist at TD Economics. And, Thomas, you've heard the debate, there are some in the markets who are saying that the US is already in recession. We've seen the markets have taken a hawkish bet lately that the Fed will hike rates so much so that the economy will fall into recession. But others like St. Louis Fed President James Bullard disagreed recently. He said that the Fed has a good chance of not tanking the economy and achieving a soft landing. So where do you see the US economy right now? What's your view?

Thomas Feltmate: Right. It's the million dollar question right now of whether or not the US economy is in recession. And of course, you've already pointed out that second quarter print on GDP coming in at 0.9%, quarter over quarter annualized negative 0.9% certainly started to ring some bells that the US economy could already be in recession.

Two quarters of contraction in economic growth is, one, I would say, a relatively narrow measure of whether or not an economy is in recession. But the thing that we need to really consider is the National Bureau of Economic Research, who is the research institute that is really in charge of dating business cycles, they look at a whole host of other economic indicators as well in trying to determine whether or not an economy is in recession. So they look at things like employment, production, retail sales, that sort of thing -- measures of income as well. And certainly, when we look at all of these, they're still showing quite a bit of promise, I would say, in terms of the US economy not yet being in a recession.

If we focus on the employment side of the economy for a second, the US economy has added 2.7 million jobs through the first six months of the year. It's a very, very healthy pace of hiring still. The unemployment rate at 3.6% is still near historic lows. And then we're also looking at things like job openings. While they have certainly come in, there's still 1.8 jobs for every unemployed person that's currently out there actively looking for a job. So definitely from what we're seeing in the labor market standpoint, it would suggest that the US economy is most definitely not yet in a recession.

Now, coming back to the GDP data, I think there's definitely some areas of concern, and we are seeing some doubts that there could be some measurement error in GDP. When we look at the movements of GDP, which would be the expenditure side of the economy, and we compare that to things like gross domestic income, which is just the income side of the economy -- so every dollar that's spent needs to show up somewhere as income -- those measures typically move together over time. But we have seen a more recent divergence, suggesting that there could be some underlying issues in how GDP might be being measured. And it could be underestimating some of the economic activity that's still present in the economy today.

Now, that's not to say we haven't seen some slowing in economic growth. Certainly, more recently, we have seen consumer and business sentiment really come in. And that is starting to come through on measures of consumer spending. We are seeing a pretty strong pullback there in underlying activity. So definitely seeing some signs of slowing, but not necessarily in a recession just yet.

Anthony Okolie: So, certainly, the Fed has actually said that they're more data dependent as opposed to providing guidance. So investors, of course, saw that the Fed hiked interest rates 75 basis points. And they're still waiting to hear from the Fed. What are your thoughts about the Fed's latest rate hike?

Thomas Feltmate: Yeah, I think it was basically in line with our expectations. Certainly, the June CPI number was what really kind of tipped us off that they're likely going to do another what they were calling super-sized rate hike, just because we did see a surprise to the upside, a further acceleration in CPI. And we know that this is on the Fed's radar right now. Price stability is kind of their key aspect that they're targeting right now. And inflation's running too hot. And they would like to bring it back closer to the Fed's target of 2%. And so that means that rates need to become more restrictive quickly.

And certainly, Chair Powell has pointed to this more recently about the importance of quickly bringing monetary policy from what was previously a very accommodative state to one that would be very restrictive as quickly as possible. So in doing so, that warranted this 75 basis point hike.

Anthony Okolie: So with this super hike, I think the big question is, is it enough to tame inflation? Because, certainly, we've heard about inflation expectations coming unmoored and that the Fed might have to actually be more aggressive in the future to tame inflation. So question -- have they done enough to tame inflation? And can it be done without actually causing a recession? What are your thoughts?

Thomas Feltmate: Yeah, that's a very good question. I would say at this point where we are, no, not necessarily. They haven't done enough just yet. So if we look at where the policy rate sits today at 2.5%, it's basically in line with the FOMC's consensus view of where the neutral rate is. And the neutral policy rate, the best way to think about that is it's the interest rate that is neither restrictive or accommodative. And because we know that they are trying to get the economy into a more restrictive territory, that suggests that interest rates are going to need to come up even more in order to tame inflation.

Now, like I said, we have started to see some slowing in economic data, suggesting that the previous rate hikes are starting to have some effect. But still, we haven't seen inflation necessarily turn yet. And that is certainly a key factor that is going to kind of play into how future interest rate hikes proceed.

Now, you've already alluded to the fact that Chair Powell has kind of moved to this more data-dependent type way of proceeding on rate hikes. And I think, certainly, the next few CPI reports, employment reports -- we get two of each before the next Fed meeting -- are certainly going to factor into how much more we're going to see in terms of rate hikes this year.

Now, if we look at the consensus view among FOMC members, they're currently predicting that we'll have another 100 basis points of tightening this year alone, which, again, will bring the policy rate well into restrictive territory.

Now, whether or not this is going to tip the economy into recession, I think most forecasters are still trying to work through that and gain some better understanding there. I think, certainly, looking at the employment numbers over the next couple of months are going to be pretty telling. Because, like I said, there is still a bit of a disconnect there in terms of still seeing really strong job growth and not necessarily something that would be indicative of a recession. But we know these things can certainly turn quick.

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