This morning's strong jobs report makes one thing perfectly clear: The U.S. is absolutely not in a recession right now.
We just learned that the economy added 372,000 jobs last month, bringing the total for the first six months of the year to a whopping 2.74 million. During the same period, the unemployment rate dropped from 4% to 3.6%. It Does Not Matter that "real" GDP declined in the first quarter, and may have declined in the second quarter. That does not mean we are in a "technical" recession.
A recession, technically speaking, is the end of a business cycle. There are no numeric rules that define it, like the "two declining quarters of GDP" people use as a casual reference point. It simply refers to the period from when broad activity peaks to when it bottoms out. And this is captured using a range of economic indicators that all have to tell the same story.
According to the committee that officially dates recessions (the "NBER"), these indicators include "real personal income less transfers, nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production." (Emphasis mine.) Obviously, the labor market data show an economy that is still expanding, not recessing, in the first half of this year. Note that real GDP isn't even mentioned as a criterium.
What about the other gauges? As for the first, real income minus government transfer payments, it was higher in May ($14.5 trillion), the latest data point, than in January ($14.44), according to the St. Louis Fed. Nonfarm payrolls we already discussed. Real consumer spending? $13.9 trillion in May, slightly above January's level. Employment per the household survey? 158 million Americans, as of today's report, versus 157 million in January. Industrial production? The index hit 105 in May, versus 102 in January.
And note that "real" growth in anything is going to be especially weak right now because inflation is so high; by contrast, the nominal figures have continued to grow substantially. Regardless, the U.S. certainly does not look like it was in a technical recession in the first half of the year, no matter what the real GDP data says.
What about from here? Fair game, obviously. If the half-dozen indicators mentioned above all are lower in December versus their levels this month, then recession. Heck, if they are obviously sharply lower by September than they are now, we're likely in recession. There is no magical time period for a recession, by the way; it usually just takes some time to make sure all the data are telling a consistent message, and recessions rarely are just one or two months long.
Everyone seems to think that just because the economy is slowing, or real spending has been flattish, and consumer sentiment is weak, it guarantees the business cycle is ending and that it's just a matter of time until we officially enter recession. I'd argue that's too fatalistic. The erosion of real spending and sentiment has been caused by inflation, and an overheating economy. The Fed has a chance to prolong the expansion by arresting inflation, and it has started to move aggressively in that direction.
With the labor market still strong, the drop in gasoline prices since the Fed's big rate hike last month could even help spark an increase in consumer sentiment and "real" spending. A slower nominal-growth economy would help fix chronic labor shortages and supply constraints that have hampered both the manufacturing and service sectors. The Fed may overshoot and slow the economy too much, but doing nothing is just going to land us in stagflationary purgatory.
"Today's report cements a 75bp hike at the July [Fed] meeting," wrote Aneta Markowska of Jefferies this morning, and "the funds rate peaking just above 4% in mid-2023." Comments from Fed officials ranging from Raphael Bostic on CNBC this morning to Chris Waller and James Bullard yesterday have continued pointing towards a desire for aggressive near-term moves. And yet, as I write this, the Dow has turned positive. Perhaps investors are learning not to overly fear a hawkish Fed.
See you at 1 p.m!
Kelly
