Rising prices and the Fed’s aggressive rate hikes sent the S&P 500 to its worst first-half performance since 1970. Consumer confidence fell to record lows. And economists are increasingly concerned that a downturn is not just happening but will happen soon – a danger highlighted by a closely watched Fed growth tracker.
Fed Chair Jerome Powell has started to say the quiet part: The central bank is willing to tolerate a recession if it means getting inflation under control. “The bigger mistake we would make,” he said on June 29, “would be not to restore price stability.”
While Biden has publicly supported Powell’s efforts, rising expectations of a recession are compounding the administration’s economic woes as Democrats head into the congressional elections this year.
“Everyone’s screaming for 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 with an unemployment rate of 3.6 percent — near record lows — and a shrinking economy would deepen the pain, bringing with it a wave of layoffs and wage cuts. “Sentiment could be a lot worse,” said Bivens, who argues that a contraction in the economy would mean the Fed had screwed up by going too far to curb rising prices.
The main theme of economic talks across the country – high inflation – is rapidly morphing into the growing certainty of an imminent recession. White House allies are preparing. Republican lawmakers are trumpeting that a decline is inevitable. Wall Street analysts are increasingly including this in their forecasts. And business leaders quickly shifted from tacit concerns to speaking openly about the economic downturn at investor meetings and within their companies.
For their part, some Democrats are still pointing to bright spots in the economy, hoping the central bank will manage to rein in growth — and thereby lower inflation — without plunging the country into a full-blown slump. Powell says he shares that hope, noting the continued strength of the economy.
“A recession would be really problematic for the American people,” Rep. Jim Himes (D-Conn.) said in an interview. “Boy, are we ever far from a recession though?”
A White House official acknowledged the economy faces a number of global risks, but said US economic strengths — a strong job market, consumer spending and business investment — “serve us well — better than almost any other country — to build on.” our strong economy base and transition to steady, stable growth with lower inflation.
“And we can do this without giving up all the economic gains we’ve made,” the official added.
But great premonitions are brewing: Does the US need a recession to curb inflation? How soon? And will the Fed keep raising rates even if the country slips into recession until inflation dies down?
Dana Peterson, chief economist at The Conference Board, a corporate research group, said she expects a “short but shallow” recession in the last three months of the year. However, other factors could worsen the situation: if property prices start falling or the war in Ukraine intensifies, oil and food prices will rise even higher. She also said her forecast assumes some of the infrastructure spending decided last year will bolster the economy and cushion the slowdown.
“If we don’t see that, we could see a deeper and longer recession,” she said at POLITICO’s “Women Rule” event.
Michael Feroli, chief US economist at JPMorgan Chase, said the downturn could start as early as this quarter as recent data shows consumer spending – the biggest driver of GDP – is slowing.
“It looks like we’re losing altitude very quickly,” he said.
The government confirmed last week that the economy contracted for the first three months of the year – and the Atlanta Fed’s economic growth tracker points to an increased likelihood of a contraction in the second quarter.
If so, it will spark an intense debate as to whether the US 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 start. The Office defines a recession as “a significant decline in economic activity that spreads across the economy and lasts longer than a few months.” No specific time frame is established for consecutive quarters.
However, many of the factors that have contributed to the decline in GDP in recent months are technical – companies have a lot of goods in their back rooms, so they don’t add as much to that inventory – leading many economists to wonder if this is the case really is the case. Recession without economic pain in the form of significant job losses.
A White House official said the fact that the US added an average of 400,000 jobs over the past three months is evidence the economy is not in a recession. June jobs data, due out on Friday 8 July, will provide more information on the state of the job market.
Himes, a Democratic congressman, said he believes the Fed has waited too long to start raising rates – an argument made by many Republicans – but also believes the US economy may weather the future.
“There is no doubt that growth will slow as a result of the Fed’s rate hikes,” he said. “But with an unemployment rate of 3.6 percent, you’re a long way from the ugly effects of the recession.”
There’s no guarantee that a recession will actually dampen inflation, although the resulting job losses would dampen the kind of consumer spending that spurred price spikes. And the Fed’s actions are already facing opposition from some Democrats.
Sen. Elizabeth Warren (D-Mass.) says the Fed is conducting aggressive rate hikes to combat an inflation problem caused largely by events beyond the central bank’s control — supply chain shortages and Russia’s war on Ukraine. She said it could hurt the economy without helping prices much.
“Inflation is like a disease and the drug needs to be tailored to the problem at hand or you could make things worse,” she told Powell during the hearing. “And right now, the Fed has no control over the main driver of rising prices.”
EPI’s Bivens said he expects inflation to slow naturally for a number of reasons: higher food and energy prices are reducing people’s ability to buy other things, government spending is falling and wage growth is showing signs of slowing. The Fed shouldn’t feel like it has to trigger a recession to bring prices down, he said.
“They seem to be moving towards an increasingly restrictive stance as they get closer to going too far,” Bivens said.
But Charles Calomiris, a Columbia Business School professor who served as chief economist at the Banking Commission under former President Donald Trump, warned that the Fed will have to inflict more pain on investors than it is currently dishing out if it really wants to beat inflation.
The best way for the Fed to deter the public from expecting ever-rising prices is to “show they’re ready for a real recession until inflation is tamed,” he said.
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