The U.S. economy rebounded in the third quarter after contracting for the first six months of this year, giving fuel to the view that the world’s largest economy may not be in a recession, though mounting signs of economic weakness suggest it may well again dive into negative territory.
Government data released on Oct. 27 showed that the economy expanded at a pace of 2.6 percent on an annualized basis between July and September. That’s slightly higher than a consensus forecast of 2.4 percent.
The rebound represents a sharp reversal from the 1.6 percent decline in the first quarter and a 0.6 percent drop in the second, which met the informal definition for a recession, sparking fierce debate about whether the economy was, in fact, in a recession.
Thursday’s GDP number is an “advance” estimate, with several revisions to come before a second estimate is released on Nov. 30.
The White House denied the economy had dipped into a recession earlier this year after the second-quarter GDP print came in negative, citing the standard used by the official arbiters of U.S. recessions, a panel of economists at the National Bureau of Economic Research (NBER), which uses a broader-based definition that GDP.
At the time, Treasury Secretary Janet Yellen reinforced President Joe Biden’s view that America’s economy had not, in fact, fallen into a recession.
“That is not what we’re seeing right now when you look at the economy. Job creation is continuing, household finances remain strong, consumers are spending, and businesses are growing,” Yellen said in a July 28 press conference, during which she insisted that “most economists and most Americans” define a recession as a “broad-based weakening” of the U.S. economy that includes businesses shuttering in significant numbers and mass layoffs.
But since then, America’s economic woes have hardly gone away. Inflation, running close to a 40-year high, is crushing household budgets. Rising interest rates have cooled the previously red-hot housing market and economists have increasingly warned that potential Fed overtightening could inflict punishing damage to the economy more broadly, including around unemployment.
Unemployment to Rise as Fed Tightens
After initially downplaying rising inflation as a “transitory,” an embarrassed Fed has moved aggressively to tighten monetary settings and stamp out surging price pressures. But the impact of rate hikes has been limited, prompting Fed officials to repeatedly say more tightening is in the pipeline.
With all the tightening under way, Fed policymakers expect that the economy will slow and unemployment will push higher from the current 3.5 percent to 4.4 percent in 2023 and 2024.
But a recent analytical note from Deutsche Bank says the Fed is low-balling its estimate on how many Americans will have to lose their jobs as the central bank corrects its course.
“Our updated analysis continues to point to the need for a sharper rise in unemployment than embedded in the Fed’s latest projections for September,” Deutsche Bank analysts wrote, predicting unemployment to jump as high as 6 percent by the end of 2023.
Unemployment at 6 percent would mean around 4 million Americans losing their jobs.
Market analyst and trader Sven Henrich said in a series of Twitter posts on Thursday that the Fed’s projection for joblessness to peak at 4.4 percent from the current 3.5 percent is without precedent.
“There is no example where the unemployment rate peaked at 4.4% coming from 3.5%. None. Rather the peaks following such low readings ends in at least 6%-8% or worse. So the Fed is clinging to a soft landing no recession narrative despite all history,” he wrote.
Henrich argued that the Fed should hit pause on its rapid rate hikes to assess their impact on the economy.
“The Fed would be well advised to slow down and assess the lag effects. If not, things, could well get ugly. Bottomline: Still lots to assess in the months to come as massive risks remain,” he said.
Stagflationary winds in the United States have intensified, with recent data from the Federal Reserve Bank of Richmond showing a sharp drop in manufacturing activity at the same time as inflationary pressures grew.
There’s also the fact that a major contributor to the relatively strong showing for third-quarter GDP was an unusually high net export figure, which experts say is unlikely to be the case going forward.
“Net exports contributed 2.8% to 3Q22 GDP, most since 3Q80,” Liz Ann Sonders, Chief Investment Strategist, Charles Schwab & Co. said in a tweet, adding that this is “unlikely to persist as positive driver” of growth going forward.
From The Epoch Times