Price spikes and aggressive Fed interest rate hikes sent the benchmark S&P 500 stock index tumbling to its worst first-half performance since 1970. Consumer confidence fell to record lows. And economists are increasingly concerned that a downturn will not just happen but will happen soon – a danger underlined by a widely watched Fed growth tracker.
Fed Chairman Jerome Powell started saying the quiet part out loud: the central bank is willing to tolerate a recession if it means controlling inflation. “The biggest mistake to make,” he said on June 29, “would be not to restore price stability.”
While Biden has publicly backed Powell’s efforts, rising expectations of a recession are compounding the administration’s economic woes as Democrats head into congressional elections this year.
“Everyone is screaming inflation,” said Josh Bivens, research director at the left-leaning Economic Policy Institute. But “people would also really hate a recession.”
Americans are already pessimistic about the economy even as unemployment sits at 3.6% – near modern-era lows – and a shrinking economy would compound the pain, leading to a wave of layoffs and job cuts. salary. “The mood could get a lot sourer,” said Bivens, who argues that if the economy shrinks, it would mean the Fed screwed up by going too far in trying to rein in soaring prices.
Across the country, the main topic of economic conversation – high inflation – is rapidly turning into growing certainty of a coming recession. The White House allies are preparing for it. Republican lawmakers are trumpeting that a slowdown is inevitable. Wall Street analysts are increasingly including it in their forecasts. And business leaders have quickly moved from muted fears to open discussions about an economic crisis in discussions with investors and within their companies.
Some Democrats, for their part, are still pointing to the bright spots in the economy and hoping that the central bank can manage to slow growth – and therefore lower inflation – without tipping the country into a full-fledged slump. . Powell said he shares that hope and pointed to the continued strength of the economy.
“A recession would be really problematic for the American people,” the rep said. Jim Himes (D-Conn.) said in an interview. “Boy, are we still far from a recession.”
A White House official acknowledged that the economy faces a series of global risks, but said the United States’ economic strengths – a strong labor market, consumer spending and business investment – ” position us well – better than almost any other country – to take advantage of our strong economic base and a transition to steady, stable growth, with lower inflation.
“And we can do that without giving up all the economic gains we’ve made,” the official added.
But worrying questions loom large: Does the United States need a recession to bring inflation under control? How long? And will the Fed continue to raise rates even if the country enters a recession until inflation recedes?
Dana Peterson, chief economist at the Conference Board, a business research group, said she anticipated a “brief but shallow” recession starting in the last three months of the year. But other factors could aggravate the situation: if real estate prices start to dive or if the war in Ukraine escalates, oil and food prices will be even higher. She also said her forecast assumes that some of the infrastructure spending enacted last year will begin to support the economy, cushioning a downturn.
“If we don’t see this, we could see a deeper and more prolonged recession,” she said at a POLITICO “Women Rule” event.
Michael Feroli, chief US economist at JPMorgan Chase, said a slowdown could even start as early as this quarter, with recent data showing that consumer spending – the main driver of GDP – is starting to slow.
“Things look like we’re losing altitude pretty quickly,” he said.
The government confirmed last week that the economy contracted in the first three months of the year – and the Atlanta Fed’s economic growth tracker points to increased chances of a contraction in the second quarter .
If that happens, it will trigger an intense debate over whether the United States is already in a recession; recessions are often defined as two consecutive quarters of negative GDP growth, although they are not official until confirmed by the National Bureau of Economic Research, usually long after they begin. The bureau defines a recession as “a significant decline in economic activity that spreads throughout the economy and lasts for more than a few months.” It does not set a particular period of consecutive quarters.
Yet many of the factors that have contributed to the contraction in GDP over the past few months are technical in nature – businesses have stockpiled a lot of goods for their back rooms and are therefore not adding as much to that inventory – which brings many economists to wonder if it really is a recession without the economic pain of noticeable job losses.
The White House official said the fact that the United States has added an average of 400,000 jobs over the past three months is proof that the economy is not in recession. The June jobs figure, due out on Friday July 8, will provide further clues to the health of the job market.
Himes, the Democratic congressman, said he thinks the Fed waited too long to start raising rates — an argument many Republicans have made — but he’s also confident the U.S. economy could hold up. what awaits him.
“There is no doubt that growth will moderate due to Fed interest rate hikes,” he said. “But with an unemployment rate of 3.6%, you are far from the ill effects of a recession.”
There is no guarantee that a recession would actually stifle inflation, although the resulting job losses would curb the kind of consumer spending that fueled the price spikes. And the Fed’s actions are already triggering a backlash among some Democrats.
Sen. Elizabeth Warren (D-Mass.) argues that the Fed is engaging in aggressive rate hikes to combat an inflation problem that is primarily caused by events that the central bank cannot fix – the supply chain problems. supplies and Russia’s war against Ukraine. She said it could hurt the economy without helping prices much.
“Inflation is like a disease, and the medications have to be tailored to the specific problem or you could make it worse,” she told Powell at a hearing. “And right now, the Fed has no control over the main driver of rising prices.”
PPE’s Bivens said he expects inflation to naturally slow for a number of reasons: Rising food and energy prices reduce people’s ability to buy other things , government spending is falling and wage growth has shown signs of slowing. The Fed shouldn’t think it has to cause a recession to drive prices down, he said.
“They seem to be locking themselves into an increasingly belligerent position, when they’re about to go too far,” Bivens said.
But Charles Calomiris, a Columbia Business School professor who served as chief economist at a banking regulatory agency under former President Donald Trump, warned that the Fed should cause more pain than investors are currently doing if it has really intend to defeat inflation.
The best way for the Fed to prevent the public from expecting persistently higher prices is if “it shows it’s prepared to have a real recession until inflation is brought under control,” he said. he declared.
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