In fact, both stories can be correct. There are good things going on in the economy, which means we may not be down yet; but there are also more worrying signs, which suggest that a recession may be imminent.
For example, last week, we got another strong jobs report, showing that 372,000 new jobs were added in June. This is a slow decline from earlier in the recovery, but it is still a historically high crime rate. Thanks to the rapid recovery of the labor market, there are more business jobs today than there were before COVID-19.
Likewise, the unemployment rate, at 3.6 percent, is also historically high. Case in point: There have been only three months this century when the unemployment rate has fallen.
It sure doesn’t sound like the economy is collapsing.
Economic output – also called gross domestic (GDP) – fell slightly in the first quarter of this year, and some forecasts suggest that it may contract again in the second quarter. Corporate profits also fell earlier this year, and stock markets have fallen sharply.
And, of course, the biggest pooper party is inflation.
Inflation also hit a 40-year high in June, at 9.1 percent over a year ago. Energy prices have caused the biggest increase, but almost everything Americans buy has gone up, including food and rent.
This increase in the cost of living has been particularly painful, especially for low-income families. That’s the main reason why consumer sentiment is the worst reading ever written.
Pa otherother side:
Americans can to say they are frustrated with the economy and angry about inflation – but they don’t seem to be doing anything about it. Consumer spending has remained strong, even after adjusting for inflation. About a third of workers say they plan to quit this year, not a sign of economic confidence.
So what to make of these confusing symptoms?
One possibility is that some of these data may cease to be controversial as soon as the data comes back and the previous numbers are updated.
Labor force statistics, for example, can also be significantly revised – especially during periods of economic change. Not because everyone is cooking books. It is very difficult to measure writing methods in real time, especially when more businesses than usual are closing or opening.
But let’s say you take the most recent estimates. Another way to relate some of these is this: The economy has taken a turn for the worse. This explains why the labor market is strong, why people seem confident enough to leave their current jobs and look for new opportunities, why they are spending more and why prices are rising fast.
It also shows why fears of a recession are growing. It’s a bit controversial, but let me explain.
The fixed interest rate of the heated economy is to increase the interest rate to reduce demand. The Federal Reserve’s goal is to raise interest rates enough to slow inflation but not so much as to tank the economy. However, the rate of inflation is worse, month after month, so the Fed will have to act more aggressively.
That is: the hotter the economy, the more cold water is needed to put out the fire. And the more cold water is poured, the more wealth will disappear.
Unfortunately, the inflation report for June was too hot. Markets have been going up in prices significantly. In May, for example, the idea that the Fed could raise rates by three percentage points in one meeting was seen as off the table. Inflation numbers then became uncomfortably high, and the Fed announced a three-quarter rate hike in June later.
That was the fastest rate hike in nearly 30 years. When the Fed meets again, later this month, markets expect another big hike — in fact, a full hike now seems possible.
This is why the markets are also crashing. That is why there is a big problem of recession in the next year. I don’t mean “recession” as the common people use the term, meaning “something goes wrong in the economy.” I mean “recession” as economists define it: a deep recession spread throughout the economy, often reflected in income, employment, GDP and other important factors.
Just like how Americans feel about the economy now – while other metrics are looking good! – The coming months can be very bad.