Pandemic reshaping of economy complicates recession forecasts

WASHINGTON- AAs people pay more than ever for everything from bacon to gasoline and the Federal Reserve hikes interest rates in response, some economists say a recession is likely on the horizon, while others say it’s already there.

“The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation are hammering growth,” World Bank President David Malpass said in a statement. statement last month. “For many countries, recession will be difficult to avoid.”

Financial markets have taken a hit in recent weeks, with stocks in the United States plunging into bearish territory in mid-June amid record inflation levels, Russia’s attack on Ukraine and problems supply chain related to the pandemic.

But a typical indicator of a recession, a growing number of people out of work, is so far nowhere to be found. In May, the unemployment rate was 3.6%, similar to pre-pandemic levels, according the Ministry of Labour.

The unusual economic situation is largely due to COVID-19, experts say, and how the pandemic has reshaped the economy, presenting Wall Street and policymakers with a unique challenge.

“In addition to the pandemic-induced recession of 2020, other recent recessions have been credit-driven, including the Great Financial Crisis of 2007-2008 and the dot-com meltdown of 2000-2001,” said Lisa Shalett. , chief investment officer at Morgan Stanley, wrote recently. “In these cases, debt excesses have accumulated in housing and internet infrastructure, and it has taken almost a decade for the economy to absorb them.”

She added: “By contrast, excess liquidity, not debt, is the most likely catalyst for a recession today. In this case, the extreme levels of COVID-related fiscal and monetary stimulus have injected money in households and investment markets, contributing to inflation and stimulating speculation in financial assets.

Officially, the United States is not yet in recession. This designation comes from the National Bureau of Economic Research, which describe recessions as involving “a significant drop in economic activity that extends across the economy and lasts for more than a few months” and uses a range of data, including employment figures, to take decisions.

“It’s hard to imagine a significant decline in economic activity without an increase in unemployment,” said Tara Sinclair, professor of economics at George Washington University. Washington Examiner by email. “Right now, people are seeing the economy as not doing well not because of a decline in economic activity, but because they can’t get all the goods and services they want from price they were paying before. It’s very different from a recession, but the Fed fighting that inflation can cause a recession. So it doesn’t look like we’re in a recession right now, but we could be heading towards a recession.

The Fed began raising interest rates in March after not doing so for several years, and last month it raised interest rate by three-quarters of a percentage point – the biggest increase since 1994.

The aggressive move followed the release of new data from the Labor Department showing inflation had yet to slow and instead continued to rise despite previous Fed actions. The consumer price index, which tracks the price consumers pay for a range of goods and services, jumped 8.6% last year, “the biggest 12-month increase since the period ended. ending in December 1981,” according to the department. said.

“We need to get inflation back to 2%,” Fed Chairman Jerome Powell told senators during a recent congressional hearing, NPR reported. “We are using our tools to do that. And the public should believe that we will bring inflation down to 2% over time.”

“We’re not trying to cause, and don’t think we’ll need to cause, a recession,” Powell said. “But we think it’s absolutely critical that we restore price stability, really for the benefit of the labor market as much as anything else.

Rep. Jim Himes (D-CT), who previously worked as a Goldman Sachs banker, recently Told Politics there is “no doubt that growth will slow” as the Fed raises interest rates. “But with unemployment at 3.6%, you are far from the unpleasant effects of a recession.”

At the end of June, the International Monetary Fund said that “the US economy has recovered strongly from the shock of COVID-19” and that “the positive effects of an unprecedented stimulus policy, combined with the benefits of a very flexible economy, have been clear”, indicating lower unemployment and poverty rates. The IMF predicted that “the US economy will slow in 2022-23 but narrowly avoid a recession”.

Still, inflation poses risks, IMF staff wrote. “The policy priority now must be to rapidly slow wage and price growth without precipitating a recession,” the group said. “It will be a delicate task. Global supply constraints and domestic labor shortages are expected to persist, and the Russian invasion of Ukraine creates additional uncertainties.

To complicate the task, according to the IMF, the fact that this economic scenario is unprecedented in recent history. “The last time the United States faced a significant acceleration in inflation was in the 1980s, a period when the structure of the economy and the monetary policy framework were markedly different” , the group said. “As a result, past episodes may not provide a useful guide to navigating the current conjuncture. This difficult political enterprise is further complicated by the uncertain and ongoing structural changes in labor markets and the broader economy that have been catalyzed by COVID-19.

Although the early months of the pandemic brought a wave of layoffs due to sudden lockdowns across the world, things have reversed more recently as companies struggle to fill vacancies, particularly in the service sector. . The labor shortage is partly due to what some have dubbed the “big quit”, a recent trend with various causes which has seen workers leave their jobs, often to take better, better paid ones, in record numbers.

Yet the United States may already be in a so-called technical recession, defined as two consecutive quarterly declines in GDP or gross domestic product. GDP fell by 1.6% in the first quarter of this year, according to the federal government Data, and a key preliminary estimate from the Fed shows the economy contracted further this quarter. GDP on track to contract 2.1% in second quarter, Atlanta Fed says GDPNow tracking.

“The long-term track record of the model is excellent”, Nicholas Colas, co-founder of DataTrek Research, wrote in a recent note. “Since the Atlanta Fed began using the model in 2011, its average error has only been -0.3 points. From 2011 to 2019 (excluding economic volatility around the pandemic), its tracking error averaged zero.

Donald Grimes, an expert in economic forecasting at the University of Michigan, analyzed another economic indicator: the real disposable income per capita in the United States, which generally increases by 2% to 3% each year, but is almost the same as ‘in February. 2020, just before the pandemic.

“A period of such weak growth is unusual outside of recessions,” the university said. wrote Grimes discoveries. “From a revenue growth perspective, we are in a recession-like period.”

Personal after-tax income is also estimated to fall 5.6% this year, the most since 1932, according to Grimes, as pandemic-related government benefits such as stimulus checks come to an end.

“The reason we’re not in a recession right now despite this weak income growth is that people accumulated huge amounts of excess savings in 2020 and 2021 when their incomes were high, but they couldn’t spend them” , wrote the university. “They’re spending those savings now.”

Either way, “recessions are notoriously difficult to predict in advance,” said Sinclair, an economics professor at George Washington University. “It is quite easy to tell that a recession is coming at some point in the future based on our past experience. It is much more difficult to quantify exactly when, how long and how deep.

Shalett, Morgan Stanley’s investment expert, said if the economy enters a recession it “will likely be shallower and less detrimental to corporate earnings than recent downturns” due to current economic factors and previous trends. .

“Historically, the damage to corporate earnings tends to be more modest during inflation-related recessions,” Shalett wrote. “For example, during the inflationary recessions of 1982-83, when the Fed raised its policy rate to 20%, and 1973-74, when the rate hit 11%, S&P 500 earnings fell 14% and 15%, respectively.. This compares to profit declines of 57% during the Great Financial Crisis and 32% during the tech crash.

Additionally, key industries, such as housing and autos, are in good shape, she said. “For automobiles, production rates are below previous peaks due to semiconductor shortages,” Shalett wrote. “As supply chains become clearer, order books could keep manufacturing activity unusually high for a recession.”

The state of the labor market is encouraging, she added: “Not only is the labor market tight, as defined by unemployment rates, but it is also showing record ratios of new job openings per report to potential candidates. This suggests that, rather than laying off current employees, companies could reduce their open job openings first, potentially delaying the impact of unemployment.

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