Foreman Angel Gonzalez and Anthony Harris, with E-Z Bel Construction, work on pipes along Fredericksburg Road during an excessive heat warning in San Antonio, Texas, July 19, 2022.
Lisa Krantz | Reuters
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.”
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
