The US economy is not in a recession right now. No, two quarters of negative growth is not, as much as you may have heard, the “official” or “technical” definition of a recession; that designation is decided by a committee that has always been based on various indicators, especially job growth. And, as Jerome Powell, chairman of the Federal Reserve, pointed out on Wednesday, the labor market continues to look robust.
That said, there is no doubt that the US economy is slowing down, basically because the Federal Reserve is deliberately engineering a slowdown to reduce inflation. And it is possible that this slowdown will end up being severe and broad enough to be labeled “R”. In fact, on this issue I think I am a little more pessimistic than the consensus; I think the odds are at least 50-50 that history tells us that we experienced a mild recession in late 2022 or early 2023, one that caused the unemployment rate to rise slightly. But, [como preguntaba Julieta a Romeo]”What’s in a name?”.
The real question is whether a moderate slowdown, whether called a recession or not, will suffice to control inflation. And the news on that front has been pretty encouraging lately.
Evidently, the price of gasoline has dropped, almost 80 cents per gallon [3,785 litros] from its maximum in mid-June. (Remember the scare stories about $6 a gallon in August?) More importantly, business surveys, which often detect economic turning points long before official statistics, are beginning to indicate a significant decline. of inflation in general. For example, an S&P Global survey found that while private sector companies continue to raise prices, the rate of inflation “has fallen to a 16-month low.”
The financial markets have taken notice. The expected rate of price increase over the next year, implied by inflation-linked swap markets (don’t ask), has plummeted from over 5% in early June to 2.45% in the morning. from Thursday. Medium-term inflation expectations have also fallen.
Now, it is very, very early to claim victory in the fight against inflation. There have been several false dawns on that front over the course of the last year and a half. And there is a lot of room to talk about the level of “core” inflation, a loosely defined term but, broadly speaking, that part of inflation that is difficult to reduce once it has risen.
The serious economists I speak to are eager to see the release of the Labor Cost Index on Friday, which is supposed to measure what is happening, yes, with the costs of employment. Will it confirm or contradict the apparent slowdown in wage growth visible in simple measures of median wages and in at least one influential survey?
Well, we’ll just have to wait and see. The good news is that monetary policymakers seem willing to do just that. In my view, the most encouraging aspect of Wednesday’s Fed statement was the paragraph stating that the monetary policy committee is willing to be flexible, that it “will continue to monitor the implications of incoming information.” ” and that “it would be prepared to adjust the monetary policy stance as appropriate”. This is a not-so-subtle rejection of inflation hawks’ demands that the Fed now commit to a long period of tight money.
As I have already indicated, early indications are that the Federal Reserve is winning its war on inflation, and it is doing so faster and with more ease than most observers anticipated. What will it mean if these first omens come true?
The big answer, I would suggest, is that we will have to reevaluate recent economic policy. As everyone should know (although many probably don’t), the US economy has been remarkably successful in bringing back jobs lost during the pandemic downturn. This good news has been overshadowed by high inflation, which has prompted many claims that US economic policy is wrong.
But much of the recent inflation reflects global forces beyond the control of the United States, so inflation has risen almost everywhere, not just here. And while the part of excess inflation that US policy reflects can be reversed fairly quickly, without serious cost, a fair reading of the record would say that the policy has actually been very effective, that a temporary rise in inflation It has been a price worth paying to avoid the kind of long-term depressed economy that we experienced after the 2008 financial crisis.
That said, for a time it seemed that the outbreak of inflation had caused permanent, even catastrophic, damage through the political process, because it had weakened the prospects for meaningful action on climate change. An episode of high inflation is not the end of the world; inaction on climate could be.
But on Wednesday (!), Senator Joe Manchin declared himself convinced that a bill addressing climate change would in fact reduce inflation. (It will.) While I’m not prepared to sell the bearskin before the bill is formally signed into law in the Oval Office, right now it looks like we’re in for both a speedy recovery and a badly needed investment in America’s future. Joined.
So even though the preliminary GDP figure (which will probably be revised several times) has been negative, from my point of view the general economic news looks quite positive.
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