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On 28 July, the Bureau of Economic Analysis (BEA) will publish
its first estimate of real Gross Domestic Product (GDP) for the
second quarter (Q2) of this year. The July 10 "Blue Chip" consensus
is that GDP grew at a 1.1% annual rate in Q2. However, based on the
most recent data, S&P Global Market Intelligence estimates that
GDP fell 1.8% during the quarter. This would follow the
first-quarter contraction of 1.6% already reported by the BEA,
thereby satisfying the popular definition of a recession: two
consecutive quarterly declines in real GDP.
In the US, the "official" arbiter of recessions is the Business
Cycle Dating Committee of the National Bureau of Economic Research.
In its deliberation—which, for this episode, is months
off—the Committee will consider several economic indicators
besides GDP. These include monthly data on industrial production,
employment, hours worked, and real personal incomes excluding
social benefits paid by government to households, all of which
grew over the first half of the year. So, while this
episode might become a recession, it doesn't look like an official
one—yet!
Nevertheless, inflation is intolerably high, unemployment
unsustainably low, and inflation expectations have crept
worrisomely above the Federal Reserve's long-run 2% objective.
While recent commodity price pressures will ease or, in some cases,
reverse as supply chain bottlenecks are cleared, an increase in
unemployment will be required to mitigate persistent inflation
pressures originating in today's extraordinarily tight labor
markets. The Federal Reserve tacitly acknowledged this when,
following its June meeting, the Federal Open Market Committee,
which sets US monetary policy and has clearly signaled its
intention to raise interest rates aggressively, dropped its
previous references to this policy being consistent with strong
labor markets.
In response, we've lowered our forecast of GDP growth for 2022
from 2.5% to 1.4%, and for 2023 from 1.8% to 1.3%—for both
years, below the 2% growth of "full-employment" GDP. Consequently,
we expect the unemployment rate to rise 1.3 percentage points, from
the current 3.6% to a peak of 4.9% by the end of 2024. We
characterize this period as a "growth recession," and expect the
consequent easing of labor market conditions will prove sufficient
to lower inflation back close to 2%.
Unfortunately, this view may also prove optimistic because the
historical experience is this: since the mid-1960s, the
unemployment rate hasn't risen 1.3 percentage points without then
rising further, oft times a good deal further. And that would make
a recession…official.
Posted 13 July 2022 by Joel Prakken, Chief US Economist and co-head of US Economics, Research Advisory Specialty Solutions, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
