The US economy is not currently in recession. No, two quarters of negative growth is not, as you may have heard, the “official” or “technical” definition of a recession; this determination is made by a committee that has always relied on several indicators, including job growth. And like Jerome Powell, Chairman of the Federal Reserve, Noted yesterday, the job market still looked solid.
That said, the US economy is definitely slowing, mostly because the Fed is deliberately staging a slowdown to bring inflation down. And it’s possible that this slowdown will end up being severe enough and widespread enough to get the R label. In fact, on this issue, I think I’m a little more pessimistic than the consensus; I think the odds are at least 50-50 that history says we had a mild recession in late 2022 or early 2023 which caused the unemployment rate to rise slightly. But what’s in a name?
The real question is whether a moderate slowdown, whether or not it is called a recession, will be enough to control inflation. And the news on that front has been quite encouraging lately.
Clearly, gasoline prices are down – nearly 80 cents per gallon from their peak in mid-June. (Remember those scare stories about $6 a gallon in August?) More importantly, business surveys—which often detect economic turning points long before official statistics—are beginning to suggest a significant drop in oil. wider inflation. For example, an S&P Global survey found that while private sector companies continue to raise prices, the inflation rate has “now fallen to a 16-month low.”
The financial markets have taken notice. The expected rate of price increase over the next year implied by inflation swap markets (don’t ask) plunged from more than 5% in early June to 2.45% Thursday morning. Medium-term inflation expectations are also down.
Now it is far, far too early to declare victory in the fight against inflation. There have been several false dawns on this front over the past year and a half. And there’s plenty of room to debate the level of “underlying” inflation – a loosely defined term, but roughly speaking the part of inflation that’s hard to bring down once it gets high.
The serious economists I talk to are very eager to see the release on Friday of the employment cost index, which is supposed to measure what happens to, uh, employment costs. Will it confirm or contradict the apparent slowdown in wage growth visible in simple measures of average wages and at least one influential investigation?
Well, we’ll have to wait and see. The good news is that policymakers seem willing to do just that. From my perspective, the most encouraging aspect of Wednesday’s Fed statement was the paragraph stating that the committee setting monetary policy is prepared to be flexible, that it “will continue to monitor the implications of incoming information.” and “will be prepared to adjust the stance of monetary policy as needed. It is a not-too-subtle rejection of the demands of the inflation hawks that the Fed is now now embarking on a long extremely tight money.
As I suggested, early indications are that the Fed is winning its war on inflation, and is doing so faster and easier than most observers expected. What will it mean if these early omens are confirmed?
The big answer, I would say, is that we will have to reassess recent economic policy. As everyone should know (although many probably don’t), the US economy has been remarkably successful in restoring jobs lost during the pandemic crisis. This good news was overshadowed by high inflation, leading to many claims that US economic policy had it all wrong.
But much of recent inflation reflects global forces beyond the control of the United States, which is why inflation has jumped almost everywhere, not just here. And if the part of the excess inflation that reflects US policy can be unwound fairly quickly, without significant costs, a fair reading of the record would indicate that the policy was in fact very successful – that a temporary rise in inflation was a price worth paying to avoid the kind of long-term depressed economy we saw after the 2008 financial crisis.
That said, for a time it seemed that a surge in inflation had done permanent, even catastrophic damage via the political process, as it undermined the prospects for meaningful action on climate change. An episode of high inflation is not the end of the world; failure to act on the climate may well be.
But on Wednesday (!) Senator Joe Manchin said he was confident that a climate change bill would indeed reduce inflation. (It will.) While I’m not ready to count my chickens until they’ve been officially signed in the Oval Office, it looks like right now we’re going to have both a quick recovery and a desperately needed investment in America. coming.
So while the preliminary GDP figure (which is likely to be heavily revised) was negative, from where I stand, the overall economic news looks quite positive.