July 29, 2022

With the US central bank making a decision to quickly raise borrowing costs in an effort to cool the economy and ease price pressures, fears are growing of a recession, if it has not already officially started.

In the face of declining public confidence, US President Joe Biden tried to prove that the economy is still normal, noting that the unemployment rate is still low at 3.6 percent and employment has remained strong.

Biden said during a press conference this week, before the data was released, that the economy “will not be in a recession”, which prompted his opponents in the Republican Party to accuse the White House of trying to redefine the term.

They said that “recharacterizing the stagnation in the White House will not reduce the suffering of Americans.”

The US economy recorded, during the first three months of the year, a contraction at an annual rate of 1.6 percent, and at that time, economists attributed the decline in gross domestic product to a discrepancy in trade data.

However, Thursday’s report showed a clear slowdown, weighed down by declining activity in the housing market, business investment and government spending.

Consumer spending also grew at a slower annual rate of one percent, with citizens spending more on health care, lodging and eating out, and spending less on goods and groceries.

“Judging from historical economic growth last year, and the restoration of all private sector jobs lost during the pandemic crisis, it is not surprising that the economy has slowed as the Federal Reserve takes steps to lower inflation,” Biden said Thursday.

“But even though we face historic global challenges, we are on the right track and we will emerge from this transition stronger and safer,” he added.

Jeffrey Frankel, a former Harvard professor and co-author of the National Commission for Economic Research, the group of academics tasked with formally declaring the recession, says he doesn’t think the recession started at the start of the year, citing strong job growth.

“Things have really slowed down, so I’m not saying all is well, the odds of a future recession are much higher than a random year,” he added.

Inflation in the United States reached 9.1 percent in June, the fastest rate of price increases in more than four decades.

On Wednesday, the US central bank responded to the problem with an unusually large rate hike, the second 0.75 percent increase since it began raising rates in March.

By increasing borrowing costs, the Fed hopes to reduce spending on items such as homes and cars, in theory to relieve some of the pressures that drive up prices, but lower demand also means less economic activity.

Recent reports have shown a decline in consumer confidence, a slowing housing market, and the first contraction in business activity since 2020.

The US stock market has also fallen since the beginning of the year, and giant companies in the social media sector such as “Meta”, the owner of Facebook and Instagram, and the car maker “General Motors”, all of which talked regarding plans aimed at slowing employment, as some other companies announced, especially In the real estate sector, regarding job cuts.

Jerome Powell, Federal Reserve Chairman, said this week that he does not believe the US economy is in a recession, but indicated that some slowdown has begun, and that more of it is likely to be necessary to return inflation to normal levels.

“The last time we had inflation this high, it was in the 1980s, and it was a very deep recession,” said Laura Feldkamp, ​​a finance professor at Columbia Business School, adding that politicians learned from that experience, raising hopes of a milder slowdown.

But the slowdown in China and Europe, which have been hit hard by rising energy prices due to Russia’s invasion of Ukraine, is worrying, and the US is not alone in raising interest rates.

“There are many other countries that have more serious problems … and they are very likely to be affected, and that might extend to us,” Frankel said.

He added that it is important to look at factors such as the labor market, in order to determine the beginning of a recession, noting at the same time that some periods of contraction cannot be described as a recession during two consecutive quarterly periods, despite the loss of many jobs.

Production estimates in the US economy are often significantly updated as more data is released, even in the UK, recessions are being reviewed.

“Macro-economists know that a recession in the US is not defined by a mechanical rule, but given the political polarization, there are people who will scoff at that and assume the worst,” Frankel said.