A Recession?
The U.S. Is In A Recession With A Strong Labour Market
Something incredibly unexpected is happening right now. The first quarter's economic output decreased, and indications point to a repeat of that trend in the second quarter. Nevertheless, during the first half of the year, the job market has shown few signs of weakness.
- The unemployment rate decreased from 4% in December 2021 to 3.6 % in May 2022
- Just under 1.25 million layoffs and discharges were reported by the Bureau of Labor Statistics (BLS) in April, a record low. Additionally, the BLS reported that there are still over 11 million job openings
"In recent weeks, the news of layoffs in the tech sector has been getting a great deal of attention. Tesla laid off about 200 workers after Reuters reported CEO Elon Musk said he had a “super bad feeling” about the economy. Netflix cut 1% of its workforce. Amazon said it was overstaffed."
"You’d be forgiven for thinking that the era of plentiful jobs America has been experiencing for the past year may have ended. Fortunately, that’s not the case." By Matt Massucci for Barron's
- Federal unemployment benefits were being collected by 1.3 million Americans as of the end of June, which is a significant decrease from the 1.7 million people who did so weekly on average during the three years before to the pandemic, when the economy was regarded as extraordinarily strong
Employment Should Stabilise At 4.1%, versus 3.6% Today
The Fed recently said that its heightened emphasis on containing inflation at all costs will probably increase unemployment. The Federal Reserve now anticipates unemployment to increase to 3.9% next year and to 4.1% the following year, reversing its previous forecast that the rate would decrease to 3.5% this year. The Fed also deleted a previous forecast that the job market would "remain strong" from its policy statement.
"The labor market is extremely tight, and inflation is much too high," Federal Reserve Chairman Jerome Powell at the FOMC Press Conference
"We don't seek to put people out of work, of course, we never think too many people are working and fewer people need to have jobs, but we also think that you really cannot have the kind of labor market we want without price stability," Powell at a public hearing
Already In A Recession
An increasing likelihood that the American economy has entered a recession is indicated by a Federal Reserve economic growth tracker. This goes against the broader consensus as most economists have been warning of a higher likelihood of future negative growth by 2023.
- The Atlanta Fed's GDPNow gauge, which continuously updates and tracks economic statistics in real-time, shows a second-quarter output decline of 2.1%
- That would meet the formal criteria for recession when combined with the first-quarter decrease of 1.6%
"The first-quarter nominal growth was 6.5%, and with inflation running at 8.6%, it will be difficult for nominal sales output to surpass that level. Anything less tips us into a recession." by Karen Firestone
BENCHMARK'S TAKE
- Inflation numbers are unsustainable and are tying the Fed's hands. According to former treasury head, Lawrence Summers, the U.S. economy needs unemployment at around 7.5% to contain inflation
- During past recessions, unemployment started increasing only after the start of a recession - the strong labor market will thus not save the economy
- It is hard to predict the broader impact of a recession before it happens. Yet, there are signs that point to a relatively mild recession
- The probability that this recession is led by an excess of debt on the consumer side is limited
- In its current state, the recession might rather affect the ones with excess savings such as shareholders who see the value of some of their risker investments plummet as higher rates render a myriad of businesses inoperable
Disclaimer
Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.
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