A U.S. recession would be ‘good news’ for marketsThe U.S. economy’s vibrant heartbeat is pulsing with hope, even as it gently decelerates. With the Federal Reserve’s tightening monetary policy, the storm clouds of recession are parting, and optimism is on the rise.
The recent series of interest rate hikes hasn’t sent the economy into the doldrums. Instead, it’s shaping a soft landing – a scenario where inflation control doesn’t wreck economic activity. There’s a growing belief that the U.S. might just pull this off. Here’s how.
The Faint Whispers of Inflation
Inflation was that haunting ghost, lingering and refusing to be banished. But now it’s cooling off, and the whispers are growing fainter.
In June, the core measure of the personal consumption expenditures index – a favorite of the Federal Reserve – dipped to 4.1%, a soothing decrease from May’s 4.6%.
This is its lowest ebb since October of last year. The employment cost index, another essential indicator, also came down to 1% in the second quarter from the previous 1.2%.
While these figures are lower than anticipated, they signal that the long-awaited soft landing might be within reach. The wage growth, despite contributing to inflation, has shown a slowdown, keeping the U.S. consumer’s pulse strong but not overly so.
However, this doesn’t mean the ghosts are completely vanquished. Though there’s optimism in the air, some still warn that a policy failure or overaggressive rate hikes could still shove the U.S. into a recession. The cautionary notes still linger, but they’re less foreboding than before.
Growth’s Resilient Dance
What’s happening on the growth front? It’s dancing, resiliently. The U.S. economy’s growth rate for the second quarter came in at 2.4% on an annualized basis. That’s not just a shuffle; it’s a robust step, outpacing the 1.8% forecast and even outdoing the 2% rate of the first quarter.
The stock market is swaying to the beat as well. The S&P 500 stock index is up almost 20% year to date, while the Nasdaq Composite has seen a 37% rise, partly thanks to the excitement surrounding artificial intelligence and big tech stocks.
Even the bond market is grooving, with riskier companies enjoying the smallest borrowing premiums in over a year.
But is this a wild dance or a measured waltz? Jay Powell, the Fed chair, has acknowledged the withdrawal of forecasts for a U.S. recession but emphasizes that there’s still a need to bring inflation down to target.
Achieving disinflation without harming the labor market is undoubtedly positive, but stronger growth could potentially reignite the inflationary fires.
In the words of one chief U.S. economist, history often associates high inflation and rapid interest rate increases with recession. But the U.S. today isn’t blindly marching to the same historical beat.
The Covid business cycle has added a unique rhythm, and the dance must be choreographed accordingly.
The U.S. economy is not in a mechanical waltz; it’s in a complex dance, balancing growth with inflation control, interest rates with economic activity. A softish landing might be on the horizon, and if inflation lands at 2.6% or 2.7% without massive job losses, it might not spell doom.
The growing hope for a gentle slowdown of the U.S. economy reflects brave optimism. It’s a dynamic picture, one that’s outspoken in its confidence but critical in its awareness of the underlying risks.
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