Is the US in a recession? Quick Take
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My initial plan was to post this summer's crypto meltdown follow-up to my Q2 review, but we got some US economic news worth examining last week.
Last Thursday, the economic data released by the Bureau of Economic Analysis showed that the US second-quarter gross domestic product fell 0.9% from a year ago and 0.2% from the first quarter. This makes it two consecutive quarters of negative economic growth -- the technical definition of a recession.
The real world is not as simple as economic textbooks; the government officials and the Fed's chairman, Jay Powell, came out and said that the US economy is not in a recession. Jay Powell cited the historically low unemployment as the main indicator of the economy's strength.
"This is a very strong [labour] market ... it doesn't make sense that the economy would be in a recession with this kind of thing happening."
The statement about the labour market strength is an interesting one. The US unemployment remains at record lows – just slightly over the pre-pandemic levels (3.6% in June vs 3.5% in February 2020).
Note: Blue line - Unemployment Rate; Red line — 3.6%
Source: St Louis Fed (FRED)
And yet, one can be sceptical about using the labour market to justify a robust state of an economy because the unemployment rate is a lagging economic indicator. In other words, people lose their jobs after the economy is already in decline.
The weekly jobless claims remained close to the highest levels since November, despite falling slightly week on week. Unemployment insurance applications have increased over the past few months due to increased job cuts and hiring freezes in various sectors.
In June, the Financial Times reported that Robinhood, Peloton and Netflix announced lay-offs, while Meta, Uber, Lyft and Snap decided to slow hiring. The crypto-exchange Coinbase announced in June that it intends to lay off a fifth of its workers. In July, Goldman Sachs indicated intentions to slow down hiring and paused finding replacements for some staff that left the company. Shopify announced last Tuesday that it would cut 10% of its workforce - around 1,000 people. The next day, Ford also announced intentions to cut jobs, with the company's CEO saying, "[the] company has too many people".
Although these announcements could stem from the period of excessive workforce expansion and some recruiters staying calm, they do induce some bad feelings about the economy.
Let's leave unemployment for now because other indicators and statistics can give us cues about an economy's strength. The Bureau of Economic Analysis report also showed a slowdown in personal spending (1% growth in Q2 vs 1.8% growth in Q1), "declines in business investment, government outlays and housing."
Household spendings are crucial for the US economy because it makes up around 68% of the country's GDP. The Conference Board statistics showed that consumer confidence dropped in July to the lowest level since February 2021 amid persistently rising inflation. Inflation concerns could force people to reduce their spending on non-essential purchases. Last week, Walmart issued a profit warning due to the deteriorating US retail environment that is impacted by the high inflation rate. Walmart is the US's (and the world’s) largest retailer and hence can be viewed as a good proxy for the state of the US economy.
What is the bottom line here? We will know whether the US economy has slipped into a recession in a few months as the GDP data is revised after the initial release. And yet, we should not take the Bureau of Economic Analysis data lightly.
The US is intertwined with the rest of the world through global trade and dollar dominance. Any economic weakness usually has a cascading effect on its trading partners. The US is the second largest importer in the world, behind China. In contrast to China's focus on manufacturing and commodity imports, most US imports are consumer-related goods.
As Ancel Lindner put in last week's Fed Watch episode, the negative impact on US consumers will hurt consumer goods producers in China before rolling further downhill affecting producers of manufacturing machinery in Europe.
As the saying goes:
"When the US sneezes, the world catches a cold."
We can already see a weakening macroeconomic environment in Europe, where consumer confidence has plummeted amid the energy crisis, which spurred recession fears. Besides, the UK could have already entered a recession, according to the ex-Bank of England policy maker.
Perhaps we won't get a definitive answer on whether the US and global economies are in a recession for another two or three months. Yet I think it's safe to say that these economies no longer look as healthy as they did before.