Danger ahead: The U.S. economy has yet to face its biggest recession challenge

On July 29, 2022, a person takes the stopper off a gasoline station in Arlington.
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It would be difficult to see a recession now. However, it’s another story.

No historical precedent has shown that an economy experiencing recession could produce. 528,000 jobs in a monthThe U.S. experienced this during July. The contraction is inconsistent with a 3.5% unemployment rate. This was the lowest level since 1969.

It doesn’t however mean there aren’t any recessions ahead. In fact, it’s the extraordinary resilience of the labor force that may pose the biggest threat to the long-term health of the wider economy. In an attempt to keep inflation under control, the Federal Reserve is trying reduce pressures from historically low jobs and rapid wage increases. highest level in more than 40 years.

Jim Baird (chief investment officer, Plante Moran Financial Advisors) stated that this allows the Fed to keep tightening, even though it may increase the chance of the economy entering recession. It’s going to not be easy to keep tightening without negative consequences for consumers and the economy.

In fact, after the solid job numbers (which included a 5.2% increase in average hourly earnings for 12 months), traders increased their expectations of an aggressive Fed. The market was estimating that 69% of central banks would increase their interest rates to 0.75 percentage points when they meet again in September. according to CME Group data.

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While President Joe Biden was happy with Friday’s big jobs report, next week could bring a more troubling data point. On Wednesday, the consumer price index (the most closely followed measure of inflation) will be released. It’s likely to continue rising pressure despite a sharp fall in gasoline prices.

The central bank will have to balance the use of rate rises to reduce inflation and not cause a recession. Rick Rieder (chief investment officer, global fixed income, asset management giant BlackRock) stated, “How to perform a soft landing’ when it is hot and landing on a runway that has never been used before”.

In a client note, Rieder stated that today’s printing, which was much higher than expected, “complicates the work of a Federal Reserve seeking to engineer a more moderate employment environment in line with its efforts to moderate inflation current levels.” The question is now: “How much longer and higher will rates need to be before inflation can control?”

More recession signs

Other ways were the Fed being bet against by financial markets.

Friday afternoon, the 2-year Treasury Note yield outperformed the 10-year note’s by the greatest margin in over 22 years. Inverted yield curves, also known as recession signs, are a warning sign that it can continue for extended periods of time. This inversion was observed since the beginning of July.

This doesn’t mean there will be a recession, but it does suggest that one could occur in the coming year. 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.

Charles Schwab’s chief investment strategist Liz Ann Sonders stated that although this isn’t my base case, it is possible to start hearing talk of inter-meeting increases. However, only if there are hot inflation reports.

Sonders described the current state of affairs as “a unique cycle”, in which the demand for services is shifting away from goods. This poses multiple problems to the economy and makes the discussion over whether the U.S. is in a recessionIt is less important to focus on the future than what lies ahead.

Economists share this view, which is widely accepted by others. They fear that the most difficult part of their journey still lies ahead.

Frank Steemers (senior economist at The Conference Board) stated, “While economic output declined for two consecutive quarters during the first-half of 2022,” adding that a robust labor market suggests that we currently are not in recession. However, the economic activity will continue to cool toward the end of this year. It is becoming more likely that the U.S. Economy will enter recession in the latter half of 2023.

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