WASHINGTON, Aug. 16 (Reuters) – Unmatched economic theories, groupthink among forecasters and political partisanship among opponents of the Biden administration have been blamed, but a year ago the U.S. Most believed the country was in, or would be in, a recession. Coming soon.
In the first two quarters of 2022, U.S. economic output contracted at an annual rate of 1.6% from January to March and 0.6% from April to June. Not technically accurate, but by popular definition, the country was already in recession.
Why not? The Federal Reserve rapidly raised interest rates, housing investment appeared to be sluggish, and the common sense was that other industries, consumer spending, and the job market would fall as well.
In a July 2022 analysis, Michael Gaipen, chief U.S. economist at Bank of America, said, “A number of factors have combined to weaken economic momentum more rapidly than previously expected.” “We now expect the U.S. economy to slip into a mild recession this year … in addition to the waning of fiscal support so far … an inflationary shock that is eroding households’ real purchasing power more than previously projected. , financial conditions are extremely tight, and the Fed has changed course to raise policy rates more rapidly.”
Fast forward a year and the July unemployment rate of 3.5% was actually lower than the point many analysts expected it to start rising, consumers continued to spend and many pundits’ economic forecasts I’m following Gap’n’s trajectory correction.
Economists surveyed by Reuters over the past year show recession risk one year ahead has risen from 25% in April 2022 to 65% in October, the month after the Fed’s first rate hike in its current tightening cycle. Most recent read: 55%.
Earlier this month, Mr. Gappen wrote of a recession already pushed into 2024, saying that “newly available data have forced us to reassess our views.” “We revise our outlook in favor of a ‘soft landing’, with growth below trend in 2024 but remaining positive throughout.”
Recession revisionists, including the Fed’s own staff, have steadily revised down the U.S. outlook according to their model and, as of last fall, had raised concerns about “downside risks” to the 12th. As of May, it has moved to citing a recession as a “plausible” outcome. And when the Fed meets in March 2023, we expect a recession to start this year.
The collapse of California-based Silicon Valley Bank is expected to impose further constraints on bank credit, saying, “Staff projections show a modest recession starting later this year, followed by a recovery over the next two years. It included doing so,” the minutes said. The Fed’s March 21-22 meeting showed that.
Fed staff forecasts in May and June “continued to assume” that the U.S. economy would slip into recession by the end of the year.
The grim outlook disappeared at the July 25-26 meeting, according to the newly released minutes.
“Staffs no longer believe the economy will slip into a mild recession heading into the end of the year,” the minutes said, but staff still believe the economy will continue to grow at its long-term potential growth rate in 2024 and 2025. He said he felt the economy would slow to a slower growth rate. Inflation has fallen and risks are ’tilted to the downside’.
Fed policymakers’ forecasts are published on a quarterly basis and are independent of staff views, but they never show GDP contracting on an annual basis.
“Chugging Together”
What’s the difference between the current recession that many thought was underway last year and the amazing upward growth?
This prediction was hardly wrong. By the third quarter of last year, growth rebounded rapidly to 3.2% annualized, and since then he has remained above 2%. That’s higher than the Fed’s target of 1.8%. economic potential. The Atlanta Fed’s GDP Nowcast now shows a staggering 5.8% output growth in the July-September quarter, indicating continued strong momentum from consumption and a surprising recovery in industrial production and housing starts. .
![Reuters Graphics](https://graphics.reuters.com/USA-FED/RECESSION/gdpzwwdobvw/chart.png)
![Reuters Graphics](https://graphics.reuters.com/USA-FED/RECESSION/gdpzwwdobvw/chart.png)
As Inflation Insights president Omail Sharif puts it, a big part of the story is the persistence of American consumers, who are “just getting by” and spending more than they expected. continues.
Spending is shifting from the greedy purchases of goods seen at the beginning of the coronavirus pandemic to a high-profile services economy that exploded this summer with multi-billion dollar movie screenings and music concerts. .
But the dollar continues to grow regardless of the basket’s contents, prompting economists to either steadily postpone the depletion of pandemic-era “salv I’m scratching my head as to whether the “hoarding” of the labor force is the cause. Rising corporate performance and earnings overcame fears about the outlook.
But that’s not all.
Perhaps higher interest rates won’t work the same way in an economy that spends more on services that are less sensitive to interest rates, and where businesses continue to borrow and invest more than many economists expected. yeah. Perhaps to take advantage of regulatory changes aimed at this. Encourage technology and green energy projects.
A surge in local government spending has also provided an unexpected boost to growth, as local governments have delayed injecting funds during the pandemic.
Will it last?
One risk is if the economy tightens more than expected and inflation flares up again, requiring Fed policy to become even tougher and trigger the inflation-destroying recession that officials still hope to avoid. be.
But the odds of that happening may be declining.
BMO Capital Markets senior economist Sal Guatieri said the Fed hopes to keep inflation down without stimulating it, saying: “We’ve been debating for some time whether to move to the ‘soft landing’ camp. But that’s not the case anymore,” he said. recession.
He said the “broad strength” in the U.S. economy “convinced me that the U.S. economy is more resilient than expected…not only will it slow down further, but it may recover.”
Reported by Howard Schneider.Editing: Paul Simao and Rosalba O’Brien
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