Economy
The numbers show the U.S. economy is at least teetering on a recession – CNBC
The White House is sure the economy is not in a recession nor headed for one. Wall Street is pretty sure there is no recession now, but isn’t as positive about what’s ahead.
Looking at the data, the picture is indeed nuanced. Nothing right now is screaming recession, though there is plenty of chatter. The jobs market is still pretty good, manufacturing is weakening but still expanding, and consumers still seem fairly flush with cash, if somewhat less willing to part with it these days.
So with second-quarter GDP data due out Thursday, the question of whether the economy is merely in a natural slowdown after a robust year in 2021 or in a steeper downturn that could have extended repercussions, will be on everyone’s mind.
“This is not an economy that’s in recession, but we’re in a period of transition in which growth is slowing,” Treasury Secretary Janet Yellen told “Meet the Press” on Sunday. “A recession is a broad-based contraction that affects many sectors of the economy. We just don’t have that.”
On Monday, Kevin Hassett, head of the National Economic Council during the Trump administration, pushed back on that view, and said the White House was making a mistake by not owning up to the realities of the moment.
“We’re … kind of in recession, right? So it’s a difficult time,” Hassett, who is now a distinguished senior fellow at the Hoover Institution, told CNBC’s Andrew Ross Sorkin during a live “Squawk Box” interview.
“In this case, if I were in the White House I would not be out there sort of denying it’s a recession,” he added.
Two negative quarters
If nothing else, the economy stands at least a fair a chance of hitting the rule-of-thumb recession definition of two consecutive quarters with negative GDP readings. The first quarter saw a gross domestic product decline of 1.6% and an Atlanta Federal Reserve gauge is indicating the second quarter is on pace to hit the same number.
Wall Street, though, is seeing things a little differently. Though multiple economists, including those at Bank of America, Deutsche Bank and Nomura, see a recession in the future, the consensus GDP forecast for the second quarter is a gain of 1%, according to Dow Jones.
Whether the U.S. skirts recession will mostly rest in the hands of consumers, who accounted for 68% of all economic activity in the first quarter.
Recent indications, however, are that spending retreated in the April-to-June period. Real (after-inflation) personal consumption expenditures declined 0.1% in May after increasing just 0.2% in the first quarter. In fact, real spending fell in three of the first five months this year, a product of inflation running at its hottest pace in more than 40 years.
It’s that consumer inflation factor that is the U.S. economy’s biggest risk now.
While President Joe Biden’s administration has been touting the recent retreat of fuel prices, there are indications that inflation is broadening beyond gasoline and groceries.
In fact, the Atlanta Fed’s “sticky” consumer price index, which measures goods whose prices don’t fluctuate much, has been rising at a steady and even somewhat alarming pace.
The one-month annualized Sticky CPI — think personal care products, alcoholic beverages and auto maintenance — ran at an 8.1% annualized pace in June, or a 5.6% 12-month rate. The central bank’s flexible CPI, which includes things such as vehicle prices, gasoline and jewelry, rose at a stunning 41.5% annualized pace and an 18.7% year-over-year rate.
One argument from those hoping that inflation will recede once the economy shifts back to higher demand for services over goods, easing pressure on overtaxed supply chains, also appears to have some holes. In fact, services spending accounted for 65% of all consumer outlays in the first quarter, compared to 69% in 2019, prior to the pandemic, according to Fed data. So the shift hasn’t been that remarkable.
Should inflation persist at high levels, that then will trigger the biggest recession catalyst of all, namely Federal Reserve interest rate hikes that already have totaled 1.5 percentage points in 2022 and could double before year-end. The rate-setting Federal Open Market Committee meets Tuesday and Wednesday and is expected to approve another 0.75 percentage point increase.
Fed monetary tightening is causing jitters both on Wall Street, where stocks have been in sell-off mode for much the year, as well as Main Street, with skyrocketing prices. Corporate executives are warning that higher prices could cause cutbacks, including to an employment picture that has been the main bulwark for those who think a recession isn’t coming.
Traders expect the Fed to keep hiking its benchmark rate, taking the fed funds level to a range of about 3.25%-3.5% by the end of the year. Futures pricing indicates the central bank then will begin cutting by the summer of 2023 — a phenomenon that wouldn’t be uncommon as history shows policymakers usually start reversing course less than a year after their last move.
Markets have taken notice of the tighter policy for 2022 and have started pricing in a higher risk of recession.
“The more the Fed is set to deliver on further significant hikes and slow the economy sharply, the more likely it is that the price of inflation control is recession,” Goldman Sachs economists said in a client note. “The persistence of CPI inflation surprises clearly increases those risks, because it worsens the trade-off between growth and inflation, so it makes sense that the market has worried more about a Fed-induced recession on the back of higher core inflation prints.”
On the bright side, the Goldman team said there’s a reasonable chance the market may have overpriced the inflation risks, though it will need convincing that prices have peaked.
Financial markets, particularly in fixed income, are still pointing to recession.
The 2-year Treasury yield rose above the 10-year note in early July and has stayed there since. The move, called an inverted yield curve, has been a reliable recession indicator for decades.
The Fed, though, looks more closely at the relationship between the 10-year and 3-month yields. That curve has not inverted yet, but at 0.28 percentage point as of Friday’s close, the curve is flatter than it’s been since the early days of the Covid pandemic in March 2020.
If the Fed keeps tightening, that should raise the 3-month rate until it eventually surpasses the 10-year as growth expectations dwindle.
“Given the lags between policy tightening and inflation relief, that too increases the risk that policy tightens too far, just as it contributed to the risks that policy was too slow to tighten as inflation rose in 2021,” the Goldman team said.
That main bulwark against recession, the jobs market, also is wobbling.
Weekly jobless claims recently topped 250,000 for the first time since November 2021, a potential sign that layoffs are increasing. July’s numbers are traditionally noisy because of auto plant layoffs and the Independence Day holiday, but there are other indicators, such as multiple manufacturing surveys, that show hiring is on the wane.
The Chicago Fed’s National Activity Index, which incorporates a host of numbers, was negative in July for the second straight month. The Philadelphia Fed’s manufacturing index posted a -12.3 reading, representing the percentage difference between companies reporting expansion vs. contraction, which was the lowest number since May 2020.
If the jobs picture doesn’t hold up, and as investment slows and consumer spending cools some more, there will be little to stand in the way of a full-scale recession.
One old adage on Wall Street is that the jobs market is usually the last to know it’s a recession, and Bank of America is forecasting the unemployment rate will hit 4.6% over the next year.
“On the labor market, we’re basically in a normal recession,” said Hassett, the former Trump administration economist. “The idea that the labor market is tight and the rest of the economy is strong, it’s not really an argument. It’s just an argument that disregards history.”
Economy
Federal budget to focus on clean economy, support for low-income Canadians, Freeland says – The Globe and Mail
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The federal government will “invest aggressively” in clean technology, Finance Minister Chrystia Freeland said Monday during a prebudget event in which she outlined the main themes of the economic plan she will deliver next week.
At a time when the U.S. government is spending billions through programs and tax breaks to spur the use of electric vehicles and clean energy, Ms. Freeland said it would “reckless” if Canada failed to also take action.
“Canada right now is really at a crucial crossroads. This is a moment when the great economies of the world have decided to embrace the clean economy,” Ms. Freeland told reporters after delivering a budget-themed speech to the International Brotherhood of Electrical Workers in Oshawa, Ont.
Ms. Freeland, who is also Deputy Prime Minister, said Canada must choose between two options.
“We also can invest aggressively in the clean economy of the 21st century in a smart, focused Canadian way – or we can be left behind,” she said. “Not making those investments is also a choice. And a choice, I believe, would be really irresponsible, really reckless.”
Monday’s speech is the latest in a series of public remarks in which the Finance Minister has provided broad outlines of the March 28 budget. She has previously said that accounting for the recently announced increase in health transfers to the provinces will be a key element. Her comments Monday add to earlier signals that the budget will include measures in response to green technology incentives contained in the Inflation Reduction Act approved last year in Washington.
In addition to those two areas of spending, Ms. Freeland said next week’s federal budget will include a “narrowly focused” boost to social safety net supports for low-income Canadians in response to the higher costs of living.
NDP Leader Jagmeet Singh, who is part of a supply and confidence agreement with the minority Liberal government, has said this should come in the form of an extension of the current six month doubling of the GST credit, a direct payment that is aimed at lower income Canadians.
Ms. Freeland did not provide specifics as to the form this support will take. She also repeated past assurances that the new spending can occur as part of a fiscally responsible budget.
Economists and business groups have cautioned that Canada can’t compete dollar-for-dollar with the billions in subsidies now on offer south of the border. A Congressional Budget Office report estimated that the measures in the Inflation Reduction Act add up to about US$400-billion over 10 years. A Credit Suisse report said the total could be twice as high.
Business Council of Canada CEO Goldy Hyder has said that Canada’s response should be about one-10th of the size of the U.S. package, given that Canada’s population is about one-10th that of the U.S. He also said that Canada’s response could include repurposing previously announced programs for business rather than funding it entirely through new spending.
In her speech, the finance minister also addressed the turmoil in financial markets following the failure of Silicon Valley Bank and this weekend’s merger of UBS and Credit Suisse.
“We have strong institutions, and we have a financial system that has proven its strength time and again,” she said. “Our financial institutions have the capital they need to weather periods of turbulence. A hallmark of our Canadian banks is prudent risk management—and this is also a core principle for those of us who regulate the financial system.”
The minister said the federal government is being vigilant and monitoring the situation closely.
Mr. Singh, the NDP leader, told The Globe last week that his party will be expecting to see cost-of-living support in the budget, including a previously promised expansion of a dental care program for lower-income Canadians.
The Conservative Party is urging the government to deliver a budget that reins in spending and avoids tax increases.
Sri Lanka’s president has said that the International Monetary Fund (IMF) has approved its request for a $2.9bn bailout and the country’s presidency said the programme will enable it to access up to $7bn in overall funding.
The IMF’s board confirmed it has signed off on the loan, which clears the way for the release of funds and kicks off a four-year programme designed to shore up the country’s economy.
The decision will allow an immediate disbursement of about $333m, the IMF said, and will spur financial support from other partners, potentially helping Sri Lanka emerge from its worst financial crisis in decades.
But IMF Managing Director Kristalina Georgieva warned that Colombo must continue pursuing tax reform and greater social safety nets for the poor – and rein in the corruption that has been partly blamed for the crisis.
“I express my gratitude to the IMF and our international partners for their support as we look to get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda,” Sri Lanka’s President Ranil Wickremesinghe said in a statement on Monday.
The country defaulted on its foreign debt in April 2022 as it plunged into its worst economic downturn since independence because of a major shortage of foreign currency reserves.
The Indian Ocean nation of around 22 million people ran out of cash to finance even the most essential imports, leading to widespread social unrest.
Mass protests over economic mismanagement, acute shortages of food, fuel and medicines, and runaway inflation forced President Gotabaya Rajapaksa to flee the country and resign in July.
Rajapaksa was replaced by President Wickremesinghe, who has implemented tough spending cuts and tax hikes in an attempt to secure IMF assistance.
IMF staff had provisionally approved the bailout in September, but the final green light was held up until China, the island’s biggest bilateral lender, agreed to restructure its loans to Colombo.
Beijing had said this year that it was offering a two-year moratorium on its loans to Sri Lanka, but the concession fell short of IMF expectations for the sustainability of the island’s debt.
Wickremesinghe had said after China agreed to restructure its loans that he expected the first tranche of the IMF package would be made available within the month.
Earlier on Monday, Wickremesinghe’s office said he was seeking a 10-year moratorium on Sri Lanka’s foreign debt as the country was out of foreign reserves to service its loans.
Officials involved in the negotiations said the terms of debt restructuring must be finalised and agreed upon by all parties before June, when the IMF is expected to review the bailout programme.
Wickremesinghe’s office said in a statement that the IMF programme will help improve the country’s standing in international capital markets, making it attractive for investors and tourists.
Wickremesinghe told the country’s parliament earlier that there were signs the economy was improving, but there was still insufficient foreign currency for all imports, making the IMF deal crucial so other creditors could also start releasing funds.
Call to tackle corruption
Colombo is also banking on the IMF deal to unfreeze billions of dollars in foreign aid for projects suspended since Sri Lanka defaulted on its loans last year.
The government has already doubled taxes, increased energy tariffs threefold and slashed subsidies in an effort to meet the preconditions of the IMF bailout.
The austerity measures have also led to strikes that halted the health and logistics sectors last week. Wickremesinghe has said he had no alternative but to go with an IMF programme.
Georgieva said Sri Lanka must stick with its controversial tax reforms, manage government expenditure and do away with energy subsidies.
In a statement, she said that “the momentum of ongoing progressive tax reforms should be maintained, and social safety nets should be strengthened and better targeted to the poor”.
She also urged Colombo to tackle endemic corruption.
“A more comprehensive anti-corruption reform agenda should be guided by the ongoing IMF governance diagnostic mission that conducts an assessment of Sri Lanka’s anti-corruption and governance framework,” she said.
Sri Lanka’s economy shrank by a record 7.8 percent last year as it grappled with its worst foreign exchange shortage since independence from Britain in 1948.
The International Monetary Fund (IMF) said Monday that its executive board has approved a nearly $3 billion US ($4.1 billion Cdn) bailout program for Sri Lanka over four years to help salvage the country’s bankrupt economy.
An IMF statement said about $333 million US ($455 million Cdn) of the funding will be disbursed immediately and the approval will also open up financial support from other institutions.
“Sri Lanka has been facing tremendous economic and social challenges with a severe recession amid high inflation, depleted reserves, an unsustainable public debt, and heightened financial sector vulnerabilities,” the IMF statement quoted managing director Kristalina Georgieva as saying.
“Institutions and governance frameworks require deep reforms. For Sri Lanka to overcome the crisis, swift and timely implementation of the EFF-supported program with strong ownership for the reforms is critical.”
The office of Sri Lanka’s president said the IMF approval will unlock financing of up to $7 billion ($9.6 billion Cdn) from the fund and other international multilateral financial institutions.
CBC’s Salimah Shivji gives an inside look at how the political and economic unrest in Sri Lanka is hurting everyday people.
Earlier this month, the last hurdle for the approval was cleared when China joined Sri Lanka’s other creditors in providing debt restructuring assurances.
“From the very start, we committed to full transparency in all our discussions with financial institutions and with our creditors,” president Ranil Wickremesinghe said in a statement from his office. “I express my gratitude to the IMF and our international partners for their support as we look to get the economy back on track for the long term through prudent fiscal management and our ambitious reform agenda.”
Wickremesinghe said he has made some tough decisions to ensure stability, debt sustainability and to grow an inclusive and internationally attractive economy.
Sri Lanka increased income taxes sharply and removed electricity and fuel subsidies, fulfilling prerequisites of the IMF program. Authorities must now discuss with Sri Lanka’s creditors on how to restructure its debt.
“Having obtained specific and credible financing assurances from major official bilateral creditors, it is now important for the authorities and creditors to make swift progress towards restoring debt sustainability consistent with the IMF-supported program,” Georgieva said.
“The authorities’ commitments to transparently achieve a debt resolution, consistent with the program parameters and equitable burden sharing among creditors in a timely fashion, are welcome,” she said.
Currency crisis
Sri Lanka announced last year that it is suspending repayment of its foreign debt amid a severe foreign currency crisis, because of a fall in tourism and export revenue due to the COVID-19 pandemic, mega projects funded by Chinese loans that did not generate income and releasing foreign currency reserves to hold the exchange rates for a longer period.
The currency crisis created severe shortages of some foods, fuel, medicine and cooking gas leading to angry street protests that forced then-president Gotabaya Rajapaksa to flee the country and resign.
Since Wickremesinghe took over, he has managed to reduce shortages and ended hours-long daily power cuts. The Central Bank says its reserves have improved and the black market no longer controls the foreign currency trade.
However, Wickremesinghe’ s government is likely to face hostility from trade unions over his plans to privatize state ventures as part of his reform agenda and public resentment may increase if he fails to take action against the Rajapaksa family, who people believe were responsible for the economic crisis.
Wickremesinghe’s critics accuse him of shielding the Rajapaksa family, who still control a majority of lawmakers in Parliament, in return for their support for his presidency.
Federal budget to focus on clean economy, support for low-income Canadians, Freeland says – The Globe and Mail
4 Ways Social Media Normalizes Unhealthy Spending And How To Break Out Of The Cycle – BuzzFeed
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