The US economy is not in a recession, but could slip into a

Where is the US economy now? Proof that the US economy is not in a recession. However, it faces a tough test in the coming year as policies are implemented, particularly by the Federal Reserve, to address sharp, multi-decade increases in nominal wages and prices. Certainly, the US economy is slowing down. It shrank at an annualized rate of 0.9% over the past three months, the second consecutive quarter of contraction. GDP declined at an annual rate of 1.6% in the first quarter of 2022.

Two consecutive quarters of negative growth are often considered bearish, but this is not the official definition. Instead, the non-biased National Bureau of Economic Research (NBER) makes this decision on a broader view of the economy: looking at six monthly indicators to determine whether the evidence “points to a significant decline in economic activity that is affecting the economy.” extends” and it lasts for more than a few months.”

What do these key indicators look like?

Real Personal Income Less Transfers: Real personal income barely increased in the first half of 2022, reflecting higher inflation. Equally, real disposable personal income has been declining for more than a year.

Non-farm payrolls: Conversely, with low unemployment and high job vacancies, the labor market remains exceptionally tight (there are currently two for every unemployed person, an indicator of a large labor supply-demand imbalance). Payroll growth added 528,000 jobs in July, bringing the US unemployment rate to a 50-year low of 3.5%.

Real personal consumption expenditure: Adjusted for inflation, personal consumption, a key driver of growth, has continued to expand this year, rising in five of the past six months. However, it has been slowing down sharply from the COVID recovery, growing at an annualized rate of just 1% in the second quarter.

Actual manufacturing and trade sales: These have declined this year. Manufacturing has struggled amid supply chain difficulties, slowing consumer spending and a shift in spending patterns away from goods.

Household employment: Household survey indicators point to a reduction in household employment levels since March, though not declining as a recession is expected.

Index of Industrial Production: Industrial production was positive in the first few months of 2022 and has flattened recently, showing a slight decline in June.

Overall, it doesn’t look like we’re seeing the “broad-based weakness” that we typically associate with bearishness. However, US growth is slowing as the Fed signals that monetary policy and fiscal conditions are being tightened. In its latest update, the IMF slashed its US growth forecast for this year to 2.3%, which is 1.4 percent lower than its April forecast, with only 1% growth forecast for next year.

Look ahead: Absent negative shocks, a key question for the world economy is whether the US can bring inflation back to 2% without a recession. The issue is closely related to the productive capacity of the economy, which needs to be rebuilt. While the outlook is uncertain, it is no surprise that unemployment is expected to rise to 5-6% from the present by 2024, along with a further slowdown in activity, with GDP contracting by a quarter or two. Such a path to the economy might qualify as a mild recession (in 2001, unemployment rose from 3.9% to 5.7% and was later called a recession). Thus, the focus should be on a potential recession next year (or going into 2024), and less about whether negative growth in the first half of 2022 means the US is in recession today.

In this context, the US economy needs sustainable changes to rebuild its productive capacity – a road to climate policy by removing supply-side bottlenecks, supporting labor force participation, encouraging investment and innovation. Developing maps and increasing productivity. Of these, the Infrastructure Investment and Jobs Act, passed last November, was a step towards removing supply-side barriers to growth. However, other steps on the agenda then failed to secure Congress support. Furthermore, the US has failed to return to open trade policies by reversing tariffs imposed by the previous administration. Against this period of relative inaction, the US Congress has revived important parts of its recently stalled reform agenda:

• The new Chips-Plus Act focuses on significantly boosting domestic semiconductor production and authorizing scientific research for the next 10 years. However, the pursuit of supply chain resilience should not sway the domestic side or the global trading system on foreign producers.

• The Inflation Reduction Act, nearing approval, will accelerate strategic investment to promote clean energy and tackle the worsening climate crisis while trying to address health care spending.

The near-term implications for the fiscal deficit and debt from this additional spending will be offset with revenue measures, so there should be minimal net impact on both near-term growth and inflation (but will help America’s transition to a cleaner economy).

Overall, the US economy is not yet in recession and more needs to be done by the Fed to reaffirm inflation expectations. Thus, emerging markets and their central banks should expect its tightening to continue.

Anoop Singh is a Distinguished Fellow of the Center for Social and Economic Progress and a former member of the 15th Finance Commission

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