A Federal Reserve indicator of economic growth suggests that the United States has entered a recession.
Most Wall Street economists believe negative growth is more likely in the future, although it won’t happen until at least 2023.
However, the Atlanta Fed’s GDPNow gauge, which follows economic data in real time and adjusts continuously, predicts a 2.1 per cent drop in second-quarter output. When combined with the 1.6 per cent fall in the first quarter, this would meet the technical definition of a recession.
“GDPNow has a strong track record, and the closer we get to July 28th’s release [of the initial Q2 GDP estimate] the more accurate it becomes,” wrote Nicholas Colas, co-founder of DataTrek Research.
The tracker fell sharply from its previous forecast of 0.3 percent increase on June 27. The drop was driven by data this week showing additional weakening in consumer spending and inflation-adjusted domestic investment, which put the April-June period in negative territory.
Rising interest rates were a significant change in the quarter. To combat rising inflation, the Fed has raised its benchmark borrowing rate by 1.5 percentage points since March, with further rises expected for the rest of the year and possibly into 2023.
Fed officials have voiced confidence that they will be able to control inflation without causing the economy to fall into recession. However, Chair Jerome Powell stated earlier this week that lowering inflation is the priority right now.
Powell was asked what he would advise the American people about how long it will take for monetary policy to address the rising cost of living during a panel discussion hosted by the European Union earlier this week.
He said he would tell the public, “We fully understand and appreciate the pain people are going through dealing with higher inflation, that we have the tools to address that and the resolve to use them, and that we are committed to and will succeed in getting inflation down to 2%. The process is highly likely to involve some pain, but the worse pain would be from failing to address this high inflation and allowing it to become persistent.”
It is unknown whether this will lead to a recession. The National Bureau of Economic Research, the official judge of recessions and expansions, observes that two consecutive quarters of negative growth are not required to define a recession. However, since World War II, the United States has never contracted in successive quarters while not being in recession.
This tracker, to be true, can be volatile and swing with each data release. However, according to Colas, the GDPNow model becomes increasingly accurate as the quarter unfolds.
“The model’s long-run track record is excellent,” he said. “Since the Atlanta Fed first started running the model in 2011, its average error has been just -0.3 points. From 2011 to 2019 (excluding the economic volatility around the pandemic), its tracking error averaged zero.”
He also mentioned that US Treasury yields had dropped dramatically in the last two weeks as a result of the reduced growth outlook.
“Stocks have taken no comfort from the recent decline in yields because they see the same issue portrayed in the GDPNow data: a US economy that is rapidly cooling,” Colas added.
(Adapted from FoxBusiness.com)
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