The US economy still has to face the biggest challenges of the recession

A person removes the nozzle from a pump at a gas station on July 29, 2022 in Arlington, Virginia.

Olivier Doolery | AFP | Getty Images

You’ll be hard pressed now to find slack in the rearview mirror. But what will happen in the future is another story.

There is no historical precedent indicating that an economy in a recession can produce 528000 jobs per month, as did the United States during the month of July. The unemployment rate of 3.5%, the lowest level since 1969, does not correspond to deflation.

But that doesn’t mean there’s no recession ahead, and ironically, it’s the sheer flexibility of the labor market that could pose the greatest long-term risk to the broader economy. The Federal Reserve is trying to relieve pressures on the state of historically difficult jobs and their rapid wage gains in an effort to control inflation that is running at its limits. Highest level in more than 40 years.

“The fact of the matter is that this gives the Fed additional room to continue tightening, even if it increases the likelihood of pushing the economy into recession,” said Jim Beard, chief investment officer at Planet Moran Financial Advisors. “It will not be an easy task to continue tightening without negative repercussions for the consumer and the economy.”

Indeed, after the strong jobs numbers, which included a 5.2% 12-month increase in average hourly earnings, traders quickly accelerated their bets on the more aggressive Fed. As of Friday afternoon, markets were allocating about 69% chance for the central bank to approve its third consecutive rate hike of 0.75 percentage point when it meets again in September, According to data from CME Group.

So while President Joe Biden celebrated his big job count on Friday, an unpleasant data point could be on the way next week. The Consumer Price Index, the most widely followed inflation gauge, will be released on Wednesday and is expected to show continued upward pressure even with the sharp drop in gasoline prices in July.

This will complicate the balancing act of the central bank using price increases to cool inflation without pushing the economy into recession. As Rick Rieder, chief investment officer for global fixed income at asset management giant BlackRock, put it, the challenge is “how to implement a ‘soft landing’ when the economy is fast, landing on a runway it hasn’t used before.”

“Today’s print, which came in much stronger than expected, complicates the task of the Federal Reserve as it seeks to engineer a more moderate business environment, in line with its attempts to adjust current levels of inflation,” Reeder said in a note to the client. “The question now is how long (and higher) rates must go before inflation is brought under control?”

More signs of stagnation

Financial markets were betting against the Fed in other ways.

The two-year Treasury yield surpassed the 10-year yield by the highest margin in nearly 22 years on Friday afternoon. This phenomenon, known as an inverted yield curve, has been a tell-tale sign of a recession especially when it lasts for an extended period of time. In the current case, the reversal has been in place since early July.

But that doesn’t mean a recession is imminent, but a recession is likely within the next year or two. While this means that the central bank has some time on its side, it could also mean that it will not have the luxury of slow increases, but will have to continue to move quickly – a situation that policymakers hoped to avoid.

“This is certainly not my base case, but I think we might start to hear some talk about price increases between meetings, but only if the next batch of inflation reports is hot,” said Liz Ann Saunders, Charles’ chief investment strategist. Schaub.

Sonders described the current situation as a “unique cycle” in which demand shifts back to services from goods and poses multiple challenges to the economy, making the debate about Whether the United States is in recession Less important than what’s to come.

This is a view widely shared by economists, who fear that the hardest part of the journey is yet to come.

“While economic output contracted for two consecutive quarters in the first half of 2022, a strong labor market means that for now we are unlikely to be in a recession,” said Frank Steamers, the Conference Board’s chief economist. “However, economic activity is expected to calm further towards the end of the year and it is increasingly likely that the US economy will fall into recession before the end of the year or early 2023.”