Surging food and petrol prices are eating into people’s spending. In April consumer prices were 8.3% higher than a year earlier. Even excluding food and energy prices, annual inflation is 6.2%. Supply-chain problems could flare up for as long as war rages in Ukraine and China sticks to its zero-covid policy.
The American labour market is red-hot, with nearly two job openings for every unemployed worker in March, the most since 1950, when data were first collected. A measure of wage growth by Goldman Sachs is at an all-time high of nearly 5.5%—a rate companies cannot bear unless they continue to raise prices fast.
The unemployment rate of 3.6% remains historically low, job growth remains strong, and, notwithstanding inflation, consumer spending continues to be like a firehose. That said, the U.S. economy shrank by an annualized rate of 1.4 percent in the first quarter of 2022, which means we may already be well on our way to the technical definition of a recession, albeit maybe a teeny-tiny one.
What have the experts said?
Various economists have been speaking to news outlets in the last week to dicsuss the challenges the US economy faces.
“We do expect we will see a recession by the end of next year, but this wasn’t the start of it,” the bank’s chief US economist, Matthew Luzzetti, told CBS News, referring to the first-quarter decline in growth. “We think we’ll see strong growth the remainder of this year.”
Another economist, Aneta Markowska, chief economist for Jefferies, an investment bank, was more positive in her belief that a recession won’t happen this year.
“I just don’t see what would cause businesses to do a complete 180 and go from ‘We need to hire all these people and we can’t find them’ to ‘We have to lay people off,’” Ms. Markowska said.
Annual inflation, increasing at rates last seen 40 years ago, and rising wages are luring some retirees back into the labor force, helping to increase supply. But the gap between demand and supply remains wide. Average hourly earnings are forecast rising 0.4% after increasing 0.3% in April.
“It will be some time before a more noticeable rebalancing between labor demand and supply of available workers,” said Veronica Clark, an economist at Citigroup in New York. “This imbalance suggests further upward pressure on inflation and the Fed is unlikely to turn more dovish until this key force underlying strong inflation is resolved.”
The US central bank has increased its policy interest rate by 75 basis points since March. It is expected to hike the overnight rate by half a percentage point at each of its next meetings this month and in July. Fed Vice Chair Lael Brainard said on Thursday she saw little case for pausing in September.
The economy’s outlook has also been dimmed by a weakening global environment in part because of Russia’s war against Ukraine and China’s zero COVID-19 policy.
“There are dark clouds on the horizon. For the next six months, we will be in a slowdown of economic activity, but I don’t necessarily know that we’re going into recession,” said Gregory Daco chief economist at EY-Parthenon in New York.
“We should back away from the notion that the next recession is going to be as severe as the prior one because conditions today are very unique. The prior two recessions are once in a 100 years type of event. So they’re not likely to be repeated.”
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