Clear Indications of an Impending Recession

Commentary

There was a lot of media discussion about the possibility that the economy has entered recession after the quarter’s spring quarter gross domestic product (GDP). The majority of those who affirm the existence of a recession are referring to the common definition, which is two quarters with declining real GDP. This news appears to support that definition.

The White House is clear to resist this view and refers to more nuanced definitions. For those of us who live in reality, however, the debate is full of empty semantics. The truth is that the U.S. is in a weak state and is expected to enter recession soon. Reckoning is almost certain due to the economic damage of inflation, and the financial strains imposed by the Federal Reserve (Fed), efforts to combat it.

The worst economic news to date came with the GDP report (pdf) from the Bureau of Economic Analysis. It showed that real economic activity was declining by 0.9 percent annually. The widespread weakness was even more telling. The real consumer spending experienced modest growth, but it was much slower than the first quarter of this year. Residential construction tumbled in real terms at a 14 percent annual rate. Businesses also saw a decline in spending on equipment and structures, as well as technology. Real government spending also shrank.

This was not all bad news. The Purchasing Managers’ Index for July came in at a level of 47.5, well below the level of 50 that demarcates the distinction between growth and decline. One part of the Labor Department’s employment report, the part that surveys households, showed an employment decline of 315,000 for the month of June.

Not all numbers were downbeat. The Labor Department’s survey of employers showed a marked contrast from the picture provided by households, indicating a 372,000 jump in June payrolls. Retail sales for June showed a robust rise of better than 12 percent at an annual rate. Over the last few months, new orders for capital equipment increased at almost 9 percent annually. Though initial claims for unemployment insurance rose in the week of July 16, the figure was still low by broad historical standards.

Regardless of the evidence available, there is a recessionary outlook due to the likelihood of continued inflationary pressures. Even if the war in Ukraine drags on, supply chain issues and the effects of it will improve. Inflation will continue to exist despite the fact that it is mainly due to Washington’s decade-long policy of extremely loose monetary policies. Just in the last few years, $5 trillion worth of new debt , has been purchased by the Fed. This is the digital equivalent to financing government through the printing press. It’s a prescription for inflation.

This type of deeply rooted inflation can lead to recession by itself. It will cause economic instability that can discourage saving and investing, which are the main engines of growth. Inflation will continue to be a problem, and the Fed may have to go to greater lengths than ever before. Even though the Fed’s recent actions are dramatic, they have not prevented credit from being used or discouraged spending. Even after recent dramatic Fed moves, 2.5% remains the benchmark federal funds rates. 25 percent remains well below the rate of inflation. Lenders are not compensated for any loss in purchasing power when interest is paid back. This is why there remains a strong incentive to borrow money and then spend it. The Fed will need to increase interest rates at or near the inflation rate in order to stop inflation from rising. This would be a significant step in the wrong direction and could lead to recession.

Fed Chairman Jerome Powell announced at the last press conference that as part of its fight against inflation, the Fed will try to achieve a “soft landing,” which is to avoid recession. The Fed Chairman Jerome Powell also stated that historically, soft landings have been “rare” and suggested that recession is likely to result from the Fed’s efforts. If the Fed does its job well, the economic decline should not extend too far into 2023. However, if the Fed does not act quickly enough, it may delay the extent of the economic downturn. But, it will be deeper and more prolonged, as the economy will need to contend with distortions from an encroaching inflation.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.