We’re Headed for a Recession – The Atlanta Fed’s GDPNow Indicator Says So.
The American economy is contracting at a rapid pace.
At the very beginning of June 2022, Elon Musk sent an email to Tesla executives to tell them that he had a super bad feeling about the American economy. Proof of the influence of the man who has more than 97 million followers on Twitter, Joe Biden, the President of the United States, took the time to answer him in person.
During a press conference, Joe Biden openly questioned Elon Musk's message that the economic situation in the United States is anything but rosy. The multi-billionaire had also suggested that he might have to lay off 10,000 Tesla employees. In the meantime, he has reversed that decision. His nervousness had already come to light a few days earlier when he explained that Tesla employees had to return to the office to work at least 40 hours a week or leave the company.
For an entrepreneur who wants to be futuristic, Elon Musk remains strangely attached to a value system from the 19th and 20th centuries. A real paradox!
Anyway, the American president cited various investments made by Tesla's competitors to prove that the U.S. is not headed for a recession.
The Fed's GDPNow is hardly reassuring
On the Fed side, there is one popular indicator that paints a rather bleak picture for the months ahead. It's the Atlanta-based central bank's GDPNow. GDPNow tracks economic data in real-time and uses it to predict whether the economy is growing or shrinking. According to this gauge, the US economy will grow by 0.9% in the second quarter of 2022:
Less than two weeks ago, GDPNow was still forecasting 1.5% growth. This means that zero growth, or worse, slowing economic growth, is getting closer and closer.
The growth forecast was weakened by, among other things, a drop in the PCE price index, which measures personal consumption expenditures, from 4.4 to 3.7%. There is one positive to note here, however: the U.S. trade deficit with the rest of the world narrowed by 19.1% to $87.1 billion between March and April 2022.
A recession is on the horizon!
In any case, economic growth has already slowed by 1.5% in the first quarter of 2022. If this is also the case in the second quarter of 2022, we can already talk about a recession. Indeed, technically speaking, a recession for a country corresponds to two consecutive quarters of economic contraction.
Nevertheless, many on Wall Street still expect that the combination of resilient consumer spending and job creation will allow the U.S. to escape recession.
On the other side of the Atlantic, 390,000 jobs were created last month. At this point, it seems that a recession is more likely to occur in 2023, according to most economists. We should see future shocks to the business cycle. The prevailing sentiment is that the economy will slow down, but in the long run, it will remain stuck at 1.8% growth.
A different definition of recession
The National Bureau of Economic Research (NBER), the official evaluator of recessions in America, notes that it is not always necessary to have two consecutive quarters of economic contraction to call a recession. In 2020, for example, a recession occurred after only one-quarter of negative growth.
The NBER defines a recession as “a significant decline in economic activity that spreads across the economy and lasts for more than a few months”.
“Indeed, most recessions identified by our procedures consist of two or more consecutive quarters of declining real GDP, but not all,” the NBER website states. “There are several reasons for this. First, we do not identify economic activity by real GDP alone, but consider a range of indicators. Second, we look at the depth of the decline in economic activity”.
While it seems more and more obvious that we cannot escape the recession in the coming months as predicted by David Malpass, the President of the World Bank, some are still looking for reasons to be hopeful by dwelling on technicalities in the definition of the recession itself.
It seems that everything is good to try to reassure oneself in these more uncertain times than ever.
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