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United States
Opinion
David Brown
David Brown

Macroscope | US recession or not, the Federal Reserve is caught between a rock and a hard place

  • The US economy has entered a technical recession but the jobless rate is close to a 50-year low, a confusing state of affairs for both investors and policymakers
  • The US central bank must reaffirm its anti-inflation credentials and let the economy and jobs take the strain

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People walk outside a Costco in Arlington, Virginia, on July 28. Headline consumer price inflation has hit a nearly 41 year-high at 9.1 per cent, even as two successive quarters of negative growth in the first half of the year mean the US economy has entered a technical recession. Photo: AFP
David Brown
When is a US recession not a recession? Certainly not when the US economy is in the thick of a very dynamic jobs boom. After two successive quarters of negative growth in the first half of the year, the US economy has entered a technical recession. Meanwhile, the US labour market is racing away with the jobless rate close to a 50-year low and inflation alarm bells sounding.

We have entered the realm of bizarro economics, and it’s no surprise that investors are confused about whether the outlook means boom or bust for stock markets. It’s an even bigger dilemma for US policymakers whether to slam on the brakes or keep pressing the policy accelerator to the floor.

The Federal Reserve may be deeply conflicted, but the time has come to reaffirm its anti-inflation credentials and let the US economy and jobs take the strain – hopefully without too much collateral damage. A soft landing is looking more like mission impossible for the Fed.

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The US economy may be showing the hallmarks of a downturn, but the National Bureau of Economic Research, the official arbiter of whether the United States is in recession or not, won’t declare it just yet. There’s the broader picture to consider, and the booming US labour market is a good reason to proceed with care.

July non-farm payroll data came in much stronger than anticipated last week, with US employers adding 528,000 jobs for the month, well above consensus forecasts for a gain of 250,000. It’s the drop in the unemployment rate to 3.5 per cent which has thrown a curveball to expectations that the economy is heading for a deeper decline, especially with average earnings rising by 0.5 per cent over the month, keeping year-on-year wage growth at a lofty 5.2 per cent.

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But this bears the hallmarks of an extremely tight labour market, which could set off a more dangerous wage-inflation spiral, after 14 years of the Fed’s monetary super-stimulus following the 2008 crash and during the Covid-19 pandemic. For the Fed’s critics, there’s a palpable sense of the chickens coming home to roost, especially with US headline consumer price inflation hitting a nearly 41 year-high in June at 9.1 per cent. The odds are that there is worse to come.

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