A person removes the nozel from a pump at a gas station on July 29, 2022 in Arlington, Virginia.
Olivier Douliery | AFP | Getty Images

You’d be hard-pressed now to find a recession in the rearview mirror. What’s down the road, though, is another story.

There is no historical precedent to indicate that an economy in recession can produce 528,000 jobs in a month, as the U.S. did during July. A 3.5% unemployment rate, tied for the lowest since 1969, is not consistent with contraction.

But that doesn’t mean there isn’t a recession ahead, and, ironically enough, it is the labor market’s phenomenal resiliency that could pose the broader economy’s biggest long-run danger. The Federal Reserve is trying to ease pressures on a historically tight jobs situation and its rapid wage gains in an effort to control inflation running at its highest level in more than 40 years.

“The fact of the matter is this gives the Fed additional room to continue to tighten, even if it raises the probability of pushing the economy into recession,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “It’s not going to be an easy task to continue to tighten without negative repercussions for the consumer and the economy.”

Indeed, following the robust job numbers, which included a 5.2% 12-month gain for average hourly earnings, traders accelerated their bets on a more aggressive Fed. As of Friday afternoon, markets were assigning about a 69% chance of the central bank enacting its third straight 0.75 percentage point interest rate hike when it meets again in September, according to CME Group data.

So while President Joe Biden celebrated the big jobs number on Friday, a much more unpleasant data point could be on the way next week. The consumer price index, the most widely followed inflation measure, comes out Wednesday, and it’s expected to show continued upward pressure even with a sharp drop in gasoline prices in July.

That will complicate the central bank’s balancing act of using rate increases to temper inflation without tipping the economy into recession. As Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock, said, the challenge is “how to execute a ‘soft landing’ when the economy is coming in hot, and is landing on a runway it has never used before.”

“Today’s print, coming in much stronger than anticipated, complicates the job of a Federal Reserve that seeks to engineer a more temperate employment environment, in keeping with its attempts to moderate current levels of inflation,” Rieder said in a client note. “The question though now is how much longer (and higher) will rates have to go before inflation can be brought under control?”

More recession signs

Financial markets were betting against the Fed in other ways.

The 2-year Treasury note yield exceeded that of the 10-year note by the highest margin in about 22 years Friday afternoon. That phenomenon, known as an inverted yield curve, has been a telltale recession sign particularly when it goes on for an extended period of time. In the present case, the inversion has been in place since early July.

But that doesn’t mean a recession is imminent, only that one is likely over the next year or two. While that means the central bank has some time on its side, it also could mean it won’t have the luxury of slow hikes but rather will have to continue to move quickly — a situation that policymakers had hoped to avoid.

“This is certainly not my base case, but I think that we may start to hear some chatter of an inter-meeting hike, but only if the next batch of inflation reports is hot,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

Sonders called the current situation “a unique cycle” in which demand is shifting back to services from goods and posing multiple challenges to the economy, making the debate over whether the U.S. is in a recession less important than what is ahead.

That’s a widely shared view from economists, who fear the toughest part of the journey is still to come.

“While economic output contracted for two consecutive quarters in the first half of 2022, a strong labor market means that currently we are likely not in recession,” said Frank Steemers, senior economist at The Conference Board. “However, economic activity is expected to further cool towards the end of the year and it is increasingly likely that the U.S. economy will fall into recession before year end or in early 2023.”

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In this article

National Guard troops pose for photographers on the East Front of the U.S. Capitol the day after the House of Representatives voted to impeach President Donald Trump for the second time January 14, 2021 in Washington, DC.
Chip Somodevilla | Getty Images

In an earnings call this week, Yum Brands CEO David Gibbs expressed the confusion many people are feeling as they try to figure out what’s going on with the U.S. economy right now:

“This is truly one of the most complex environments we’ve ever seen in our industry to operate in. Because we’re not just dealing with economic issues like inflation and lapping stimulus and things like that. But also the social issues of people returning to mobility after lockdown, working from home and just the change in consumer patterns.”

Three months earlier, during the company’s prior call with analysts, Gibbs said economists who call this a “K-shaped recovery,” where high-income consumers are doing fine while lower-income householders struggle, are oversimplifying the situation.

“I don’t know in my career we’ve seen a more complex environment to analyze consumer behavior than what we’re dealing with right now,” he said in May, citing inflation, rising wages and federal stimulus spending that’s still stoking the economy.

At the same time, societal issues like the post-Covid reopening and Russia’s war in Ukraine are weighing on consumer sentiment, which all “makes for a pretty complex environment to figure out how to analyze it and market to consumers,” Gibbs said.

Gibbs is right. Things are very strange. Is a recession coming or not?

There is ample evidence for the “yes” camp.

Tech and finance are bracing for a downturn with hiring slowdowns and job cuts and pleas for more efficiency from workers. The stock market has been on a nine-month slump with the tech-heavy Nasdaq off more than 20% from its November peak and many high-flying tech stocks down 60% or more.

Inflation is causing consumers to spend less on nonessential purchases like clothing so they can afford gas and food. The U.S. economy has contracted for two straight quarters.

San Francisco’s cable cars return to service after COVID-19 shutdown in San Francisco, California, United States on September 21, 2021.
Anibal Martel | Anadolu Agency | Getty Images

Downtown San Francisco doesn’t quite have the ghost town feel it did in February, but still has vast stretches of empty storefronts, few commuters and record-high commercial real estate vacancies, which is also the case in New York (although Manhattan feels a lot more like it’s back to its pre-pandemic hustle).

Then again:

The travel and hospitality industries can’t find enough workers. Travel is back to nearly 2019 levels, although it seems to be cooling as the summer wanes. Delays are common as airlines can’t find enough pilots and there aren’t enough rental cars to satisfy demand.

Restaurants are facing a dire worker shortage. The labor movement is having its biggest year in decades as retail workers at Starbucks and warehouse laborers at Amazon try to use their leverage to extract concessions from their employers. Reddit is filled with threads about people quitting low-paying jobs and abusive employers to … do something else, although it’s not always exactly clear what.

A shrinking economy typically doesn’t come with high inflation and a red-hot labor market.

Here’s my theory as to what’s going on.

The pandemic shock turned 2020 into an epoch-changing year. And much like the 9/11 terrorist attacks in 2001, the full economic and societal effects won’t be understood for years.

Americans experienced the deaths of family members and friends, long-term isolation, job changes and losses, lingering illness, urban crime and property destruction, natural disasters, a presidential election that much of the losing party refuses to accept, and an invasion of Congress by an angry mob, all in under a year.

A lot of people are dealing with that trauma — and the growing suspicion that the future holds more bad news — by ignoring propriety, ignoring societal expectations and even ignoring the harsh realities of their own financial situations. They’re instead seizing the moment and following their whims.

Consumers aren’t acting rationally, and economists can’t make sense of their behavior. It’s not surprising that the CEO of Yum Brands, which owns Taco Bell, KFC and Pizza Hut, can’t either.

Call it the great unrest.

How might that manifest itself? In a decade, how will we look back at the 2020s?

Perhaps:

  • Older workers will continue to leave the workforce as soon as they can afford it, spending less over the long term to maintain their independence, and stitching together freelance or part-time work as needed. The labor market will remain tilted toward workers.
  • Workers in lower-paying jobs will demand more dignity and higher wages from their employers, and be more willing to switch jobs or quit cold if they don’t get them.
  • People will move more for lifestyle and personal reasons rather than to chase jobs. Overstressed workers will continue to flee urban environments for the suburbs and countryside, and exurbs one-to-three hours’ drive from major cities will see an upswing in property values and an influx of residents. Dedicated urban dwellers will find reasons to switch cities, creating more churn and reducing community bonds.
  • The last vestiges of employee loyalty will disappear as more people seek fulfillment ahead of pay. As one tech worker who quit her job at Expedia to work for solar tech company Sunrun recently put it, “You just realize there’s a little bit more to life than maxing out your comp package.”
  • Employees who proved they could do their jobs remotely will resist coming back to the office, forcing employers to make hybrid workplaces the norm. Spending patterns will change permanently, with businesses catering to commuters and urban workers continuing to struggle.
  • Those with disposable income will vigorously spend it on experiences — travel, restaurants, bars, hotels, live music, outdoor living, extreme sports — while curbing the purchase of high-end material goods and in-home entertainment, including broadband internet access and streaming media services. The pandemic was a time to hunker down and upgrade the nest. Now that we’ve got all the furniture and Pelotons we need, it’s time to go out and have fun.

It’s possible that this summer will be the capstone to this period of uncertainty and consumers will suddenly stop spending this fall, sending the U.S. into a recession. Further “black swan” events like wars, natural disasters, a worsening or new pandemic, or more widespread political unrest could similarly squash any signs of life in the economy.

Even so, some of the behavioral and societal shifts that happened during the pandemic will turn out to be permanent.

These signals should become clearer in earnings reports as we move further from the year-ago comparisons with the pandemic-lockdown era, and as interest rates stabilize. Then, we’ll find out which businesses and economic sectors are truly resilient as we enter this new era.

WATCH: Jim Cramer explains why he believes inflation is coming down

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A cooldown in the job market is underway: The number of job openings dropped in June while near-record numbers of people continued to quit and get hired into new roles, according to the Labor Department’s latest Job Openings and Labor Turnover Summary.

The labor market posted 10.7 million new job openings in June, which is down from 11.3 million in May but also much higher than a year ago and a more than 50% increase from before the pandemic. Despite the drop, there are still roughly 1.8 open jobs for every person who is unemployed.

Meanwhile, workers are continuing to leverage the market and make moves: 6.4 million people were hired into new jobs, and 4.2 million voluntarily quit — leveling off from record highs but still extremely elevated.

The job market cooldown is “far from a plunge,” says Nick Bunker, director of economic research at Indeed Hiring Lab.

“The labor market is loosening a bit, but by any standard it is still quite tight,” Bunker adds. “The outlook for economic growth may not be as rosy as it was a few months ago, but there’s no sign of imminent danger in the labor market.”

People are concerned about the future of jobs but are still quitting now

Workers are growing more concerned about having their pick of jobs in the months to come, but it’s not stopping many of them from calling it quits right now. The share of people who left their jobs voluntarily in June make up 2.8% of the workforce.

Workers’ confidence in the job market decreased slightly in June and July compared with May, according to a ZipRecruiter index measuring sentiment across 1,500 people. The index also showed an uptick in job-seekers who believe there will be fewer jobs six months from now, a decrease in people who say their job search is going well and a slight increase in people who feel financial pressure to accept the first job offer they receive.

People may also be spooked by headlines of big-name companies, especially ones across tech and housing sectors that saw Covid-era growth, announcing layoffs, hiring freezes and rescinded job offers in recent months.

Bunker recognizes “there are pockets of the economy and labor market going through turbulence,” he says, “but they’re for the most part concentrated pockets.”

These workers may also be getting hired into new jobs pretty quickly. The national unemployment rate held steady at 3.6% in June.

Looking ahead, Bunker expects to see payroll growth and expanding employment in the jobs report out Friday. “If you’re thinking of switching jobs, it’s still a good time,” he says, adding that job-seekers may focus more on going to an industry, sector or employer with a “strong economic outlook.”

A hiring slowdown doesn’t indicate an inevitable recession

In contrast with strong job numbers, economists and consumers alike are worried about a potential recession.

“We have a paradox in our economy because of conflicting signals,” says Andrew Flowers, a labor economist at Appcast and research director at Recruitonomics.

For example, the share of people filing for unemployment insurance has ticked up in recent weeks. But according to the Labor Department’s report, layoffs stayed just under 1% in June, near record-lows.

Bunker says inflation concerns are likely to blame, but reasons for “heightened concern about a recession have not fully materialized yet.”

Flowers says the latest jobs numbers signal more of an economic slowdown than a recession. And even so, lower hiring demand might not result in mass layoffs.

“Should people be worried? Right now, it’s unclear,” Flowers says. “My message to job-seekers and workers is that it’s not clear this economic slowdown will result in a material increase in unemployment.”

He adds: “As the economy shifts to a lower gear of growth, which is the Fed’s intention, that doesn’t mean we’ll suddenly have 10% unemployment.”

Check out:

It’s worth it to bring up inflation at work, even if you don’t get a raise now

What’s a good salary or raise to ask for right now? How to find your number in this wild job market

3 reasons your recruiter ghosted you, according to a hiring pro

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A sign is posted in front of a home for sale on July 14, 2022 in San Francisco, California. The number of homes for sale in the U.S. increased by 2 percent in June for the first time since 2019.
Justin Sullivan | Getty Images

Rising mortgage rates and inflation in the wider economy caused housing demand to drop sharply in June, forcing home prices to cool down.

Home prices are still higher than they were a year ago, but the gains slowed at the fastest pace on record in June, according to Black Knight, a mortgage software, data and analytics firm that began tracking this metric in the early 1970s. The annual rate of price appreciation fell two percentage points from 19.3% to 17.3%.

Price gains are still strong because of an imbalance between supply and demand. The housing market has had a severe shortage for years. Strong demand during the coronavirus pandemic exacerbated it.

Even when home prices crashed dramatically during the recession of 2007-09, the strongest single-month slowdown was 1.19 percentage points. Prices are not expected to fall nationally, given a stronger overall housing market, but higher mortgage rates are certainly taking their toll.

The average rate on the 30-year fixed mortgage crossed above 6% in June, according to Mortgage News Daily. It has since dropped back into the lower 5% range, but that is still significantly higher than the 3% range rates were in at the start of this year.

“The slowdown was broad-based among the top 50 markets at the metro level, with some areas experiencing even more pronounced cooling,” said Ben Graboske, president of Black Knight Data & Analytics. “In fact, 25% of major U.S. markets saw growth slow by three percentage points in June, with four decelerating by four or more points in that month alone.”

Still, while this was the sharpest cooling on record nationally, the market would have to see six more months of this kind of deceleration for price growth to return to long-run averages, according to Graboske. He calculates that it takes about five months for interest rate impacts to be fully reflected in home prices.

Markets seeing the sharpest drops are those that previously had the highest prices in the nation. Average home values in San Jose, California, have fallen 5.1% in the last two months, the biggest drop of any of the top markets. That chopped $75,000 off the price.

In Seattle, prices are down 3.8% in the past two months, or a $30,000 reduction. San Francisco, San Diego and Denver round out the top five markets with the biggest price reductions.

The cooling in prices coincides with a sharp jump in the supply of homes for sale, up 22% over the last two months, according to Black Knight. Inventory is still, however, 54% lower than 2017-19 levels.

“With a national shortage of more than 700,000 listings, it would take more than a year of such record increases for inventory levels to fully normalize,” said Graboske.

Price drops will not affect the average homeowner as much as they did during the Great Recession, because homeowners today have considerably more equity. Tight underwriting and several years of strong price appreciation caused home equity levels to hit record highs.

Despite that, the strong demand in the market recently could present a problem for some. About 10% of mortgaged properties were purchased in the last year, so price drops could cause some borrowers to edge much lower in their equity positions.

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Neel Kashkari, Minneapolis Federal Reserve
Brendan McDermid | Reuters

If you’re debating whether or not the U.S. is in a recession, you’re asking the wrong question, according to a top Federal Reserve official.

“Whether we are technically in a recession or not doesn’t change my analysis,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told CBS’ “Face the Nation” on Sunday. “I’m focused on the inflation data. I’m focused on the wage data. And so far, inflation continues to surprise us to the upside. Wages continue to grow.”

Last month, U.S. inflation jumped to a four-decade record high, rising 9.1% from a year ago. At the same time, the labor market remained strong: Nonfarm payrolls increased by 372,000 last month, alongside a low national unemployment rate of 3.6%.

On Thursday, new Labor Department data showed signs of a job market cooldown, with initial jobless claims hitting their highest level since mid-November. Still, Kashkari said, the labor market is “very, very strong.”

“Typically, recessions demonstrate high job losses, high unemployment, those are terrible for American families. And we’re not seeing anything like that,” he said.

The problem, Kashkari said, is that even in a strong job market, inflation is outpacing wage growth — giving many Americans a functional “wage cut” as living costs increase nationwide. Solving that problem by reducing inflation is the Federal Reserve’s top goal right now, he added.

“Whether we are technically in a recession or not doesn’t change the fact that the Federal Reserve has its own work to do, and we are committed to doing it,” Kashkari said.

The Bureau of Economic Analysis reported on Thursday that the country’s gross domestic product shrunk for the second straight quarter, often a warning sign accompanying economic recessions. For Kashkari, that may actually be a good thing: An economic slowdown could help reduce inflation to the point where it no longer outpaces wage growth.

“We definitely want to see some slowing [of economic growth],” he said. “We don’t want to see the economy overheating. We would love it if we could transition to a sustainable economy without tipping the economy into recession.”

Doing so poses a significant challenge for the Fed. Kashkari acknowledged that economic slowdowns tend to be very difficult to control, “especially if it’s the central bank that’s inducing the slowdown.”

Still, he said, the bank will do whatever is necessary to tame inflation.

“We’re going to do everything we can to avoid a recession, but we are committed to bringing inflation down, and we are going to do what we need to do,” Kashkari said. “We are a long way away from achieving an economy that is back at 2% inflation. And that’s where we need to get to.”

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An inflation gauge that the Federal Reserve uses as its primary barometer jumped to its highest 12-month gain in more than 40 years in June, the Bureau of Economic Analysis reported Friday.

The personal consumption expenditures price index rose 6.8%, the biggest 12-month move since the 6.9% increase in January 1982. The index rose 1% from May, tying its biggest monthly gain since February 1981.

Excluding food and energy, so-called core PCE increased 4.8% from a year ago, up one-tenth of a percentage point from May but off the recent high of 5.3% hit in February. On a monthly basis, core was up 0.6%, its biggest monthly gain since April 2021.

Both core readings were 0.1 percentage point above the Dow Jones estimates.

Fed officials generally focus on core inflation, but have turned their attention recently to the headline numbers as well, as food and fuel prices have soared in 2022.

The BEA release also showed that personal consumption expenditures, a gauge of consumer spending, increased 1.1% for the month, above the 0.9% estimate and owing largely to the surge in prices. Real spending adjusted for inflation increased just 0.1% as consumers barely kept up with inflation. Personal income rose 0.6%, topping the 0.5% estimate, but disposable income adjusted for inflation fell 0.3%.

Earlier this month, data showed the consumer price index rose 9.1% from a year ago, the biggest gain since November 1981. The Fed prefers PCE over CPI as a broader measure of inflation pressures. CPI indicates the change in the out-of-pocket expenditures of urban households, while the PCE index measures the price change in goods and services consumed by all households, as well as nonprofit institutions serving households.

There was other bad inflation news Thursday.

The employment cost index, another figure Fed policymakers follow closely, rose 1.3% in the second quarter. That represented a slight decline from the 1.4% gain in the previous quarter, but was ahead of the 1.1% estimate. Further, the 5.1% increase on a 12-month basis marked a record for a data series that goes back to the first quarter of 2002.

“The rest of the economy might be slowing down, but wages are speeding up,” said Nick Bunker, economic research director at job placement site Indeed. “Competition for workers remains fierce as employers have to keep bidding up wages for new hires. These red-hot wage growth statistics may fade in the near term, but there’s a long way for them to drop.”

The Fed has been using a recipe of rate increases and a reduction in asset holdings to bring down prices that have soared to their highest levels since the Reagan administration and have helped cool consumer spending.

Private sector wage gains of 1.6% for the quarter are “seriously disappointing” for the Fed, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The Fed follows the ECI figures because they adjust for compositional effects, or imbalances between gains from higher- and lower-wage workers, as well as other factors.

“Wage gains at this pace are far too high for the Fed, because they would require implausible rapid productivity growth in order to be consistent with the inflation target in the medium-term,” Shepherdson wrote.

Fed officials earlier this week approved a second consecutive 0.75 percentage point increase in the central bank’s benchmark interest rate. Inflation by any measure has been running well above the Fed’s 2% longer-run target, and Chairman Jerome Powell said the central bank is “strongly committed” to bringing inflation down.

In normal times, the Fed focuses on inflation excluding food and energy costs because they are so volatile and don’t always reflect longer-run trends. But Powell acknowledged Wednesday that policymakers need to be attentive to both types of inflation in the current environment.

“Core inflation is a better predictor of inflation going forward, headline inflation tends to be volatile. So, in ordinary times, you look through volatile moves in commodities,” he said. “The problem with the current situation is that if you have a sustained period of supply shocks, those can actually start to undermine or to work on de-anchoring inflation expectations. The public doesn’t distinguish between core and headline inflation in their thinking.”

Markets expect the Fed to raise rates by another half percentage point in September, according to the CME Group’s FedWatch tracker. However, the probability for a bigger three-quarter-point hike rose Friday morning to 38%.

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Growth in the euro zone economy accelerated in the second quarter of the year, but the region’s prospects get hit as Russia continues to reduce gas supplies.

The 19-member bloc registered a gross domestic product rate of 0.7% in the second quarter, according to Eurostat, Europe’s statistics office, beating expectations of 0.2% growth. It comes after a GDP rate of 0.5% in the first quarter.

The numbers contrast sharply with the negative annualized readings out of the United States for both the first and second quarter, as the euro zone continues to benefit from the reopening of its economy after the pandemic.

However, a growing number of economists are expecting the euro zone to slide into a recession next year, with Nomura, for example, forecasting an annual contraction of 1.2% and Berenberg pointing to a 1% slowdown.

Even the European Commission, the executive arm of the EU, has admitted that a recession could be on the cards — and as early as this year if Russia completely cuts off the region’s gas supplies.

Officials in Europe have become increasingly concerned about the possibility of a shutdown of gas supplies, with European Commission President Ursula von der Leyen saying Russia is “blackmailing” the region. Russia has repeatedly denied it’s weaponizing its fossil fuel supplies.

However, Gazprom, Russia’s majority state-owned energy giant, reduced gas supplies to Europe via the Nord Stream 1 pipeline to 20% of full capacity this week. Overall, 12 EU countries are already suffering from partial disruptions in gas supplies from Russia, and a handful of others have been completely shut off.

European Economics Commissioner Paolo Gentiloni said the latest growth figures were “good news.”

“Uncertainty remains high for the coming quarters: [we] need to maintain unity and be ready to respond to an evolving situation as necessary,” he said.

The GDP readings come at a time of record inflation in the euro zone. The European Central Bank hiked interest rates for the first time in 11 years earlier this month — and more aggressively than expected — in an effort to bring down consumer prices.

However, the region’s soaring inflation is being driven by the energy crisis, meaning further cuts of Russian gas supplies could push up prices even more.

“Given the challenging geopolitical and macroeconomic factors that have been at play over the past few months, it’s positive to see the eurozone experience growth, and at a higher rate than last quarter,” Rachel Barton, Europe strategy lead for Accenture, said in an email.

“However, it’s clear that persistent supply chain disruption, rising energy prices and record-breaking levels of inflation will have a longer-term impact.”

Meanwhile, Andrew Kenningham, chief Europe economist at Capital Economics, said Friday’s GDP figure would mark “by far the best quarterly growth rate for a while.”

“Indeed, news that inflation was once again even higher than anticipated only underlines that the economy is heading for a very difficult period. We expect a recession to begin later this year,” he added.

Eurostat also published revised inflation figures Friday, putting annual inflation at 8.9% in July, up from 8.6% in June.

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Everyone who cares knows that recessions happen when there are two consecutive quarters of negative growth — everyone, that is, except for the people who actually decide when the economy is in recession.

For those folks, at the National Bureau of Economic Research, the definition of recession is much squishier.

Officially, the NBER defines recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The bureau’s economists, in fact, profess not even to use gross domestic product, the broadest measure of activity, as a primary barometer.

People shop in a supermarket as inflation affected consumer prices in New York City, June 10, 2022.
Andrew Kelly | Reuters

That’s important, because data coming Thursday could indicate the U.S. saw its second straight negative-growth period in the second quarter. Even though every period since 1948 of two consecutive negative quarters has coincided with a recession, that may not happen this time.

Why? It’s complicated.

“The NBER would be laughingstocks if they said we had a recession when we were creating 400,000 jobs a month,” said Dean Baker, co-founder of the Center for Economic and Policy Research. “I can’t even imagine they would think for a second that we’re in a recession.”

Indeed, nonfarm payrolls grew an average 457,000 a month during the first six months of the year, hardly conditions associated with an economic downturn. Moreover, there are 11.3 million job openings and just 5.9 million available workers to fill them, indicating hiring should continue to be strong.

The case for recession

But there have been downsides as well.

Consumer spending on a dollar level has been solid, but when adjusted for a 40-year high for inflation it has been much less so. The U.S. trade deficit hit a record high in March, another negative for GDP. Inventories have lagged, which also hurts growth as it is measured by the Bureau of Economic Analysis.

To the public, though, these are just details left for economists to figure out. If the second-quarter GDP number comes in negative, and journalists and the White House don’t call a recession, it’s bound to spark confusion and perhaps some anger from those who have been hit by surging inflation and a clear slowdown in aspects of the economy.

After all, there are a lot of things that are making it feel like a recession from sky-high prices, widespread product shortages and warnings from companies like Walmart that profits are shrinking due to changing consumer habits, just to name three.

The first quarter saw GDP contract 1.6%, and the Atlanta Federal Reserve’s real-time tracker is indicating the same decline for Q2.

“I think it’s still just a game of semantics. The trajectory of the economy is clearly lower, whether we’re going to define it as [a recession] or not,” said Peter Boockvar, chief investment officer at the Bleakley Advisory Group. “If anything, the third quarter is going to show further weakness. So you could have three quarters in a row of contraction for GDP. Does that technically mean we’re in a recession?”

The criteria

For its part, the Cambridge, Massachusetts-based NBER is a bit of a shadowy group, meeting in private and not making recession calls generally months after they begin, and sometimes not until well after they’ve ended. Its most recent call came from the Covid-19 downturn, which it said began in February 2020 and ended two months later.

Still, the government and most business news outlets take the NBER’s rulings as gospel when determining expansions and contractions.

The organization is generally thought to use six factors: real personal income minus transfer payments, nonfarm payrolls, employment as gauged by the Bureau of Labor Statistics’ household survey, real personal consumption expenditures, sales adjusted for price fluctuations and industrial production.

The NBER did not reply to a CNBC request for comment.

“If this definition feels involved, it’s because it is,” Tim Quinlan, senior economist at Wells Fargo, said in a client note. “Defining a recession isn’t easy and extends beyond simply a downturn’s duration to how deep and widespread it is throughout the economy.”

Quinlan said the data points can be broken into four bigger groups: production, income, employment and spending.

“The economy has never been in recession when at least three NBER indicators rose during the month,” he said. “While we do not yet have real sales through May, nonfarm employment, real personal income less transfers and industrial production all rose during the month, suggesting the economy is not yet in recession.”

If the NBER does not call a recession anytime soon, the next question will be what is down the road.

Boockvar sees a recession as an inevitability, with the NBER declaration just a matter of timing. “I wouldn’t be surprised if their recession start date was a little bit later,” he said.

For all his optimism about first-half growth, Baker said he sees GDP coming in plus or minus 0.4%. After that, he acknowledges that there’s still a chance of a recession in the months ahead, though he thinks there’s a good chance the U.S. will avoid that fate.

Like many others, Baker fears that Federal Reserve interest rate increases aimed at controlling inflation and slowing the economy could overdo it and cause a downturn ahead.

But he’s sure that conditions from the first half do not point to a recession.

“Were we in a recession in the first half? That just makes zero sense,” Baker said. “The NBER people, I respect them as serious economists. There’s no way they’re going to say that’s recession.”

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Foreman Angel Gonzalez and Anthony Harris, with E-Z Bel Construction, work on pipes along Fredericksburg Road during an excessive heat warning in San Antonio, Texas, July 19, 2022.
Lisa Krantz | Reuters

The White House is sure the economy is not in a recession nor headed for one. Wall Street is pretty sure there is no recession now, but isn’t as positive about what’s ahead.

Looking at the data, the picture is indeed nuanced. Nothing right now is screaming recession, though there is plenty of chatter. The jobs market is still pretty good, manufacturing is weakening but still expanding, and consumers still seem fairly flush with cash, if somewhat less willing to part with it these days.

So with second-quarter GDP data due out Thursday, the question of whether the economy is merely in a natural slowdown after a robust year in 2021 or in a steeper downturn that could have extended repercussions, will be on everyone’s mind.

“This is not an economy that’s in recession, but we’re in a period of transition in which growth is slowing,” Treasury Secretary Janet Yellen told “Meet the Press” on Sunday. “A recession is a broad-based contraction that affects many sectors of the economy. We just don’t have that.”

On Monday, Kevin Hassett, head of the National Economic Council during the Trump administration, pushed back on that view, and said the White House was making a mistake by not owning up to the realities of the moment.

“We’re … kind of in recession, right? So it’s a difficult time,” Hassett, who is now a distinguished senior fellow at the Hoover Institution, told CNBC’s Andrew Ross Sorkin during a live “Squawk Box” interview.

“In this case, if I were in the White House I would not be out there sort of denying it’s a recession,” he added.

Two negative quarters

If nothing else, the economy stands at least a fair a chance of hitting the rule-of-thumb recession definition of two consecutive quarters with negative GDP readings. The first quarter saw a gross domestic product decline of 1.6% and an Atlanta Federal Reserve gauge is indicating the second quarter is on pace to hit the same number.

Wall Street, though, is seeing things a little differently. Though multiple economists, including those at Bank of America, Deutsche Bank and Nomura, see a recession in the future, the consensus GDP forecast for the second quarter is a gain of 1%, according to Dow Jones.

Whether the U.S. skirts recession will mostly rest in the hands of consumers, who accounted for 68% of all economic activity in the first quarter.

Recent indications, however, are that spending retreated in the April-to-June period. Real (after-inflation) personal consumption expenditures declined 0.1% in May after increasing just 0.2% in the first quarter. In fact, real spending fell in three of the first five months this year, a product of inflation running at its hottest pace in more than 40 years.

It’s that consumer inflation factor that is the U.S. economy’s biggest risk now.

While President Joe Biden’s administration has been touting the recent retreat of fuel prices, there are indications that inflation is broadening beyond gasoline and groceries.

In fact, the Atlanta Fed’s “sticky” consumer price index, which measures goods whose prices don’t fluctuate much, has been rising at a steady and even somewhat alarming pace.

The one-month annualized Sticky CPI — think personal care products, alcoholic beverages and auto maintenance — ran at an 8.1% annualized pace in June, or a 5.6% 12-month rate. The central bank’s flexible CPI, which includes things such as vehicle prices, gasoline and jewelry, rose at a stunning 41.5% annualized pace and an 18.7% year-over-year rate.

One argument from those hoping that inflation will recede once the economy shifts back to higher demand for services over goods, easing pressure on overtaxed supply chains, also appears to have some holes. In fact, services spending accounted for 65% of all consumer outlays in the first quarter, compared to 69% in 2019, prior to the pandemic, according to Fed data. So the shift hasn’t been that remarkable.

Should inflation persist at high levels, that then will trigger the biggest recession catalyst of all, namely Federal Reserve interest rate hikes that already have totaled 1.5 percentage points in 2022 and could double before year-end. The rate-setting Federal Open Market Committee meets Tuesday and Wednesday and is expected to approve another 0.75 percentage point increase.

Fed monetary tightening is causing jitters both on Wall Street, where stocks have been in sell-off mode for much the year, as well as Main Street, with skyrocketing prices. Corporate executives are warning that higher prices could cause cutbacks, including to an employment picture that has been the main bulwark for those who think a recession isn’t coming.

Traders expect the Fed to keep hiking its benchmark rate, taking the fed funds level to a range of about 3.25%-3.5% by the end of the year. Futures pricing indicates the central bank then will begin cutting by the summer of 2023 — a phenomenon that wouldn’t be uncommon as history shows policymakers usually start reversing course less than a year after their last move.

Markets have taken notice of the tighter policy for 2022 and have started pricing in a higher risk of recession.

“The more the Fed is set to deliver on further significant hikes and slow the economy sharply, the more likely it is that the price of inflation control is recession,” Goldman Sachs economists said in a client note. “The persistence of CPI inflation surprises clearly increases those risks, because it worsens the trade-off between growth and inflation, so it makes sense that the market has worried more about a Fed-induced recession on the back of higher core inflation prints.”

On the bright side, the Goldman team said there’s a reasonable chance the market may have overpriced the inflation risks, though it will need convincing that prices have peaked.

Financial markets, particularly in fixed income, are still pointing to recession.

The 2-year Treasury yield rose above the 10-year note in early July and has stayed there since. The move, called an inverted yield curve, has been a reliable recession indicator for decades.

The Fed, though, looks more closely at the relationship between the 10-year and 3-month yields. That curve has not inverted yet, but at 0.28 percentage point as of Friday’s close, the curve is flatter than it’s been since the early days of the Covid pandemic in March 2020.

If the Fed keeps tightening, that should raise the 3-month rate until it eventually surpasses the 10-year as growth expectations dwindle.

“Given the lags between policy tightening and inflation relief, that too increases the risk that policy tightens too far, just as it contributed to the risks that policy was too slow to tighten as inflation rose in 2021,” the Goldman team said.

That main bulwark against recession, the jobs market, also is wobbling.

Weekly jobless claims recently topped 250,000 for the first time since November 2021, a potential sign that layoffs are increasing. July’s numbers are traditionally noisy because of auto plant layoffs and the Independence Day holiday, but there are other indicators, such as multiple manufacturing surveys, that show hiring is on the wane.

The Chicago Fed’s National Activity Index, which incorporates a host of numbers, was negative in July for the second straight month. The Philadelphia Fed’s manufacturing index posted a -12.3 reading, representing the percentage difference between companies reporting expansion vs. contraction, which was the lowest number since May 2020.

If the jobs picture doesn’t hold up, and as investment slows and consumer spending cools some more, there will be little to stand in the way of a full-scale recession.

One old adage on Wall Street is that the jobs market is usually the last to know it’s a recession, and Bank of America is forecasting the unemployment rate will hit 4.6% over the next year.

“On the labor market, we’re basically in a normal recession,” said Hassett, the former Trump administration economist. “The idea that the labor market is tight and the rest of the economy is strong, it’s not really an argument. It’s just an argument that disregards history.”

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The queue of vessels waiting to unload goods at the Port of Los Angeles, North America’s busiest container port, has fallen 80% since the start of the year as global container prices continue to slide, pointing to more easing in supply chain disruptions

The backlog of vessels waiting outside Los Angeles has fallen from a record high of 109 to 20 and the port moved 876,611 twenty-foot equivalent units (TEUs) in June in its best record in over 100 years.

“We’re going box for box with the record that we set for the first half just last year. So the cargo keeps moving. And the efficiencies of getting that cargo from the ship to shore by rail and truck continues to improve,” Port of Los Angeles Executive Director Gene Seroka told CNBC’s “Squawk Box Asia” on Friday. 

“We reduced that backlog of ships since the beginning of the year … now we want to get that number to zero.”

The increased efficiency is a contrast to the delays triggered by the pandemic in 2020 and 2021.

We’ve got to get the cargo picked up at the inland rail facilities by our importers much quicker than they’ve been doing thus far.
Gene Seroka
Port of Los Angeles executive director

At the height of supply chain crisis, these 100 odd vessels idled outside Los Angeles and Long Beach, waiting to unload. Before Covid-19, little wait time was needed for a berth. The pandemic also hurt domestic transportation as a result of trucker shortages due to Covid-19 infections. 

While improved, conditions have not returned to pre-Covid levels and more improvements are needed, in particular the delivery of goods inland after the vessels have unloaded, Seroka said. 

“We’ve got to get the cargo picked up at the inland rail facilities by our importers much quicker than they’ve been doing thus far,” he said. 

“That’ll help the Western railroads get the equipment engine power and cruise back here to Los Angeles and keep evacuating this cargo at a faster pace than we witnessed so far.”

Seroka said the trucker strike protesting California’s new “gig worker” law at the Port of Oakland should not affect the improved pace set so far.

In an aerial view, shipping containers sit idle at the Port of Oakland on July 21, 2022 in Oakland, California. Truckers protesting California labor law Assembly Bill 5 (AB5) have shut down operations at the Port of Oakland after blocking entrances to container terminals at the port for the past four days. An estimated 70,000 independent truckers in California are being affected by the state AB5 bill, a gig economy law passed in 2019 that made it difficult for companies to classify workers as independent contractors instead of employees. The port shut down is contributing to ongoing supply-chain issues. 
Justin Sullivan | Getty Images

The easing bottlenecks on the West Coast come as container prices continue to fall from their pandemic records.

Port lockdowns and a shortage of containers in 2020 and 2021 contributed to skyrocketing leasing costs. But now there is an oversupply of containers and prices have been falling since September.

“The current situation of oversupply of containers is a result of a series of reactionary market disruptions that began soon after the outbreak of the pandemic in early 2020,” logistics platform Container xChange chief executive Christian Roeloffs said in a new analysis this week. 

“With the rise in demand, congestion at ports increased and the container capacity was held up for a considerably long period of time. This led to the panic ordering of new boxes at record levels,” he said.

“With time, as markets reopen and demand softens, the oversupply is a natural outcome of demand-supply forces balancing at new levels.”

According to Drewry’s recently published container leasing report, the global pool of shipping containers increased by 13% to almost 50 million TEUs in 2021. There is now a surplus of 6 million TEUs globally. 

While more containers bring welcomed relief for those paying for freight, Roeloffs said freight prices will not fall quickly as disruptions, while eased, remain acute. 

Economic shifts such as cooler demand in response to monetary policy and inflation will also contribute to fresh supply chain disruptions. 

“The main factor that has driven up [freight] prices has been a supply-side crunch over the past two years because of lengthening turnaround times of containers … that still holds true,” Roeloffs said. 

“Demand on the other hand has softened now.”

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