By Kristina Hooper, Global Market Strategist, Invesco
Despite the Federal Reserves tightening, the US economy seems to be resilient and doesn’t feel like it’s in recession — at least not yet. Kristina Hooper explains why and examines the balancing acts taking place across the global economy.
- The US economy
It might not feel like a recession, but it feels like a slowdown. There is definitely real consumer pain
- UK inflation
The Bank of England is in a delicate balancing act, trying to tame inflation without snuffing out its economy.
- China’s housing market
China’s economy is still recovering from COVID lockdowns but is now facing headwinds from the property sector.
My 16-year-old daughter plays club basketball and so, as we have done for the last several years, we spent time in July traveling to different tournaments in multiple states (with a stop at the beach along the way). From Louisville, Kentucky, to Michigan City, Indiana, to Chicago, Illinois, to Uncasville, Connecticut (and a few other stops on the road in between), we saw a US economy that was quite strong. There were many consumers out dining and shopping and a number of “help wanted” signs were out — despite high gas prices, increased costs for food, and reports of very negative consumer sentiment.
We saw this economic strength on full display with July’s US jobs report. Far more non-farm payrolls were created than expected. Wages rose an unexpectedly high 0.5% for the month and are up 5.2% for the year — after appearing to be cooling last month.1 The Twitterverse lit up after the jobs report was released, with many economists, strategists and plain old pundits heralding what they viewed as an economy on fire that refused to be hindered by the Federal Reserve’s aggressive tightening. I felt like I was living in a Queen mini rock opera, with the lyrics from “Don’t Stop Me Now” swirling in my head.
Maybe not a US recession, but a slowdown
But the reality is far more nuanced. A deeper dive into the US employment situation report shows that the number of part-time jobs held by people who wanted full-time employment increased by 303,000.1 Not an ideal jobs picture — but not terrible either. After all, the Institute for Supply Management’s Purchasing Managers’ Index (PMI) survey figures for July showed an economy that is still in expansion — July manufacturing PMI was 52.8 while non-manufacturing PMI was 56.7.2 However, the US economy is most definitely not on fire.
And that’s the key takeaway. It might not feel like a recession, but it feels like a slowdown. There is definitely real consumer pain; it has been reported that more Americans are skipping meals because of higher food prices. And households are racking up credit card debt, likely because they can’t afford living expenses. All that shouldn’t be a surprise given that real incomes have fallen significantly this year. This situation — a US economy that has both significant strengths and weaknesses — was one of the disconnects I wrote about in a recent blog.
And so yes, despite the Fed’s very rapid and substantial tightening, the US economy seems to be rather resilient and certainly doesn’t feel like it’s in recession — at least not yet. The reality is, as Fed Chair Jay Powell recently acknowledged, that much of the Fed’s tightening has yet to turn up in economic data — there is a lag, of course. So it’s only a matter of time before we see more signs of a slowdown in the jobs reports and elsewhere. At the risk of sounding like a broken record, the Fed’s actions will largely dictate just how significant the slowdown is.
Despite those areas of weakness — and the two consecutive quarters of contraction for US gross domestic product — I think it’s likely that the Fed will raise rates by 75 basis points in September given the robust jobs report. However, more data will be coming in before that decision has to be made — namely the Consumer Price Index (CPI), which comes out on Wednesday, Aug. 10.