Sometimes the debate misses what is right in front of its face and this is taking place at the moment with the US economy. I have been pointing out the issue for a while and let me enlist the help of the Atlanta Federal Reserve.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2022 is -1.6 percent on July 19, down from -1.5 percent on July 15. After this morning’s housing starts report from the US Census Bureau, the nowcast of second-quarter real residential investment growth decreased from -8.8 percent to -10.1 percent.
Regular readers will know we have been on this case for a while now as first expected growth ebbed away and then we saw expected declines. Should the forecast be true then in our terms we will see a quarterly fall of 0.4% which will come on the back of this.
Real gross domestic product (GDP) decreased at an annual rate of 1.6 percent in the first quarter of 2022, according to the “third” estimate released by the Bureau of Economic Analysis. ( US BEA )
So should the Atlanta Fed be correct with its running count of the evidence released so far then the US will be in a recession. Actually the language is frequently changing and some now call it a technical recession. Actually in a very revealing move there was an attempt last Thursday to move the goal posts.Here is a release from the White House.
What is a recession? While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle.
So we have an official denial of the official definition!? How do they want us to measure it then?
Instead, both official determinations of recessions and economists’ assessment of economic activity are based on a holistic look at the data—including the labor market, consumer and business spending, industrial production, and incomes.
It is true that the US NBER measures it this way although as the Reserve Bank of Australia points out below it usually makes no difference.
While the NBER agrees that most recessions will, in fact, have two consecutive quarters of negative growth in real GDP, it says that this will not always be so.
Returning to the White House view they pretty quickly get to their reason for releasing their view.
Based on these data, it is unlikely that the decline in GDP in the first quarter of this year—even if followed by another GDP decline in the second quarter—indicates a recession.
That is the crux of the matter as they are afraid the US will see 2 quarters of contraction and do not want people to be saying the US is in recession.
I would like to pick out a point as it relates to one of my themes.
Finally, although the unemployment rate is not on the committee’s list, the fact that it has held at a historically low 3.6 percent in the past four months also has bearing on the recession question.
At the moment we have lots of countries with what look like low unemployment rates combined with economies that in my opinion are struggling. They are mot telling us what we might think ( which is why I look at hours worked for example) and are misleading. This is not a new occurrence as back in 1983 the fictional Prime Minister Jim Hacker tells us “nobody believes the unemployment rate” in Yes Prime Minister.
Bad Timing Too
It is hard not to have a wry smile at the way this was followed by events.
Recession probabilities are never zero, but trends in the data through the first half of this year used to determine a recession are not indicating a downturn.
Then on Friday morning for them we got this.
The headline Flash US PMI Composite Output Index
registered 47.5 in July, down notably from 52.3 in June to
signal a solid contraction in private sector output. The rate
of decline was the sharpest since the initial stages of the
pandemic in May 2020, as both manufacturers and service
providers reported subdued demand conditions. ( Markit )
So the very next day they got a clear confirmation from a signal they follow.
“The preliminary PMI data for July point to a worrying
deterioration in the economy. Excluding pandemic
lockdown months, output is falling at a rate not seen
since 2009 amid the global financial crisis, with the
survey data indicative of GDP falling at an annualised
rate of approximately 1%. Manufacturing has stalled and
the service sector’s rebound from the pandemic has gone
into reverse, as the tailwind of pent-up demand has been
overcome by the rising cost of living, higher interest rates
and growing gloom about the economic outlook.”
For newer readers I am not much of a fan of the PMI series but it was not alone as there was also this.
US Initial Jobless Claims Jul 16: 251K (est 240K; 244K) – US Continuing Claims Jul 9: 1384K (est 1340K; 1331K) ( @LiveSquawk)
JPMORGAN: “On a %3m/3m basis, jobless claims have risen over 16%; recessions in the US have typically been preceded by increases of similar size. ( @CarlQuintanilia )
Money Supply
Sadly we no longer have the measure I used as a yardstick which was M1 as the definition was changed in the pandemic taking it from narrow to broad money. Apart from the obvious issue that M1 has to be narrow money via the use of 1 it mislead many to proclaim surges in money supply growth which were a redefinition of the order of US $11 trillion.
But we do have the monetary base which peaked at just over US $6.4 trillion in December and was just below US $5.6 trillion in June. So in monetary terms the short-term brake had been applied to the economy.
Comment
There is another significant economic event on its way this week and let me briefly hand you over to the Financial Times.
The Federal Open Market Committee on Wednesday is set to confirm market expectations and raise its benchmark policy rate by 0.75 percentage points for the second consecutive month. That will hoist the federal funds rate to a new target range of 2.25 per cent to 2.50 per cent, in line with officials’ long-term estimates of a “neutral” policy setting.
My other measure of what is expected comes to the same answer as the Bank of Canada raised by 1% and in my opinion 0.25% of that was to allow for it being wrong-footed by the late change to 0.75% by the Fed last time.
The problem is that as I have frequently pointed out they dithered for quite some time claiming inflation is “transitory” and now find themselves raising into an existing slow down, and thus making it worse. In strict economic terms they have twice been pro-cyclical when they are supposed to be anti-cyclical. It is quite a failure for the “independent” central bank creed because they got the job to stop politicians doing that. Or as Bob Seeger put it.
You’re still the same (still the same)
(Baby-baby, still the same)
Moving game to game (still the same)
(Baby-baby, still the same)
It is quite possible that they will increase interest-rates by 0.75% on Wednesday and the US Bureau of Economic Analysis will declare another quarterly GDP decline and hence a recession on Thursday. The numbers are tight and I am sure the statisticians will be under pressure but it is remarkable we are even discussing this.
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