Federal Reserve Chairman Jerome Powell reacts as he testifies before the Senate Banking, Housing and Urban Affairs Committee’s hearing on the “Annual Monetary Policy Report to Congress,” on Capitol Hill in Washington, DC, USA, June 22, 2022.
Elizabeth Frantz | Reuters
A Federal Reserve economic growth tracker is pointing to an increasing possibility that the US economy has entered a recession.
Most Wall Street economists point to the possibility of negative growth ahead, but think it won’t arrive until at least 2023.
However, GDP of the Atlanta Fed measurement, which tracks economic data in real time and continuously adjusts, shows a 1% drop in second-quarter output. Coupled with the 1.6% drop in the first quarter, that would fit the technical definition of a recession.
“GDPNow has a strong track record and we’re getting closer to the July 28 release date [of the initial Q2 GDP estimate] Nicholas Colas, co-founder of DataTrek Research, writes.
The tracker has fallen pretty quickly from its last estimate of 0.3% growth on June 27. This week’s data shows further weakness in consumer spending and inflation-adjusted domestic investment prompted the cuts, sending the April-June period into negative territory.
One big change in the quarter was interest rate increase. In an effort to contain rising inflation, the Fed has raised its benchmark borrowing rate by 1.5 percentage points since March, with a likely increase for the rest of the year and perhaps into 2023.
Fed officials have expressed optimism that they will be able to tame inflation without tipping the economy into recession. However, Chairman Jerome Powell said earlier this week reduce inflation This is the most important job right now.
At a group discussion earlier this week presented by the European Union, Powell was asked what he would tell the American people about how long monetary policy would take to address the rising cost of living.
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 deal with the problem.” and we are determined to use them, and we are committed and will succeed in bringing inflation down to 2%.The process will most likely involve some pain, but the worse pain will be unresolved. tackle this high inflation and let it persist.”
Whether that turns into a recession is still unknown. The National Office of Economic Research, the official arbiter of recession and expansion, noted that two consecutive quarters of negative growth not necessary for a recession declared. However, since the Second World War, there has not been a case where the US has contracted for consecutive quarters without a recession.
To be sure, this tracker is volatile and changes with each release of data. However, Colas noted that the GDPNow model will become more accurate as the quarter progresses.
He said: “The long run record of the model is amazing. “Since the Atlanta Fed first started running the model in 2011, its average error has been -0.3 points. From 2011 to 2019 (excluding economic volatility around the oceans) translation), its tracking error is zero on average.”
He further noted that US Treasury yields have noted a slower growth outlook, falling significantly over the past two weeks.
“Stocks are uncomfortable with the recent drop in yields because they see the same problem described in GDPNow data: the US economy is cooling rapidly,” Colas added.
