For all the debate over and ambiguity in recent statistics, the U.S. economy can only be described as weak. Economic pessimists claim that it’s already in recession, pointing to the past two consecutive quarters of declining real gross domestic product (GDP).
The White House and members of the Democratic Party are, for obvious political reasons, loath to make such a concession. They cling to a more technical definition of recession formulated by the venerable National Bureau of Economic Research and point to historically strong hiring rates to claim that there’s more economic strength than meets the eye.
Though there’s ammunition for both optimists and pessimists, the balance of data points to economic weakness, if not yet outright recession. Moreover, the broader picture points strongly to recession on the horizon and relatively soon because of inflation and the Federal Reserve’s (Fed) imposition of more restrictive monetary policies to fight inflation.
Behind these impressive tallies, however, other aspects of the Labor Department’s report suggest less strength. The department’s separate survey of households indicated a jobs gain of 626,000 in July and August, a good showing historically but far short of the payroll increases from the employers’ survey that have been emphasized by the White House and much of the media.
Outside the Labor Department’s accounting, there are, of course, the first and second quarter declines in real GDP. Weakness also comes through in declining measures of consumer confidence. Though the Conference Board’s measure showed a modest uptick in August, it failed to overcome the earlier declines and remains 10 percent below last December’s level. Reporting by the Institute of Supply Management showed no gain in August after a 5.5 percent drop in July, hardly a signal of strength. This list is, of course, far from complete, but it is nonetheless indicative.
In themselves, these inflation rates are sufficient to impair economic growth prospects by eroding business and consumer confidence, as well as discouraging the savings and investments on which economic growth ultimately depends. These effects could bring on recession all on their own. It certainly wouldn’t be the first time in history that inflation did so.
A more potent recessionary threat emerges from the Fed’s fight against inflation. This effort began in March. Earlier, it had pursued a pro-inflationary monetary policy. It had kept short-term interest rates near zero and poured new money into financial markets by buying bonds directly—mostly Treasurys and mortgages—what the Fed refers to as “quantitative easing.”
But since March, the Fed has begun to drain money from financial markets by selling the hoard of bonds it had previously acquired and pushing up short-term interest rates by some 1.75 percentage points. These standard anti-inflation moves also restrain economic activity. Moreover, the Fed seems determined to take further steps along these lines in the coming weeks and months—a pattern that will make recession still more likely.
If this assessment is correct—and it seems likely—the statistics on which the White House and other optimists rely will soon turn against their view. The evidence of economic weakness, if not outright recession, will become overwhelming. Whether this resolution of the economic picture takes place in the next month or two remains uncertain. Still, it’s hardly likely that today’s ambiguities will remain in place much longer.
