Why the US can avoid a 'real' recession

Nearly 70 percent of economists surveyed believe NBER will make this call at some point next year, according to a University of Chicago survey.

US gross domestic product fell 0.35 percent in the first quarter, slowing annual growth to 3.6 percent. Interestingly, part of the blow was through the trade balance where imports of services exploded to a record $US51.6 billion ($76.6 billion). Half of that comes from the cost of using intellectual property due to a temporary boost from the costs of rights to broadcast the Winter Olympics.

The second quarter GDP data will be released on July 28, and that could touch and head for a technical recession. But that doesn’t mean the country will be in an NBER-defined recession.

Morgan Stanley US economist Julian Richers thinks there may be a technical recession but not a recession, as defined by the NBER.

Under pressure: Fed Chair Jerome Powell is trying to avoid a 1970s-style price spiral. Bloomberg

“The latest trade data this week has moved our second quarter GDP down to 0.1 percent, just above, making it the second straight quarter of real GDP contraction. If second-quarter GDP ends negative, this would meet the definition of a ‘technical recession’,” Richers said.

“However, given the strength in other parts of the economy, in particular final demand and the labor market, we think the information content is limited and unlikely to be identified as an official NBER recession.”

Unemployment in America is near a 50-year low of 3.6 percent, but that doesn’t necessarily rule out a recession. There has been a lower unemployment rate at the start of the last 12 recessions in the US since World War II. In 1953, unemployment was 2.5 percent, according to the Federal Reserve Bank of St. Louis. In 1969, the unemployment rate was 3.5 percent and in 2019, before COVID-19 hit, it was the same.

But Deutsche Bank’s US economist Brett Ryan said the health of the country’s job market meant it was unlikely that a full-blown recession was occurring in the US.

“Despite a slightly more than 40 percent increase in initial jobless claims from the March 2022 low, continuing claims remain near historical lows and about 500,000 below pre-COVID levels,” Ryan said. “While real GDP is on track to contract for the second straight quarter, we need to see a more meaningful rise in continuing claims to definitively state that a recession is imminent.”

Oxford Economics senior economist Bob Schwartz is also skeptical about the prospect of a recession. “The June employment report shows that the economy is neither on the cusp of a recession — let alone already in one — nor is it overheated.”

“That means financial markets will be seeking more clarity on the economic landscape in the coming months, suggesting more volatility amid growing speculation about what the Fed will do.”

Australian investment bank Barrenjoey is watching the US economy closely and its chief macro strategist, Damien Boey, said the missing link in the US recession debate was the easing or tightening of supply-side restrictions in the housing market.

“We have the ingredients for a technical recession. In fact, we thought we were already in one,” he said. “If housing supply or listings increase from their current unusually low levels, prices will stagnate and create an economic downturn – while if housing supply remains low, prices will stabilize and ensure that any economic downturn is shallow and fleeting.”

He also thinks the next rate decision will be a tipping point. “Now is the tipping point. The Fed doesn’t want to be too mature,” he said. “We are now more concerned about higher rates slowing the economy than about higher inflation.”

Biden said this week that, although the inflation rate was “very high”, it may have peaked, and he noted that the latest report was “out of date”.

But for Powell, expectations around inflation remain a real concern. He said at a media conference this month that he doesn’t take inflation expectations — as measured by the Michigan Inflation Expectations Gauge — for granted.

“We take it very seriously. Michigan’s early reading… was quite interesting. We see that the general inflation expectations index has moved up after being fairly flat for a long time. So, we watched that, and we thought, this is something we need to take seriously.”

As Powell remains focused on fighting inflation with interest rates, there may be no way to avoid a recession. In that scenario, it would be Biden who would face the wrath of the American people.

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