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The US economy didn't get the recession memo – CNN

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New York (CNN Business)The American economy didn’t get the memo that it’s supposed to already be in a recession.

The brutal GDP report released on July 28, showing the economy had contracted for a second quarter in a row, led some to insist the much-feared recession had already arrived.
And in some ways that makes sense: Since 1948, every period of back-to-back quarters of negative growth coincided with a recession.
But the recession-is-already-here argument has been severely undermined since that GDP report came out. A series of events in the past 10 days suggest those recession calls are, at a minimum, premature.
Yes, the economy is cooling off after last year’s gangbusters growth. But no, it does not appear to be suffering the kind of downfall that would qualify as a recession.
Consider the following developments:
  • The economy added more than half a million jobs in July alone.
  • The unemployment rate dropped to 3.5%, tied for the lowest level since 1969.
  • Inflation chilled out (relatively speaking) in July for both the consumers and producers.
  • Gas prices tumbled below $4 a gallon for the first time since March.
  • Consumer sentiment has bounced off record lows.
  • The stock market notched its longest weekly winning streak since November.
Mark Zandi, chief economist at Moody’s Analytics, has only grown more confident that the US economic recovery is intact.
“This is not a recession. It’s not even in the same universe as a recession,” Zandi told CNN. “It’s just patently wrong to say it is.”
Zandi said the only thing signaling an ongoing recession is those back-to-back quarters of negative GDP. Yet he predicted those GDP declines will eventually get revised away. And there are early indicators that GDP will turn positive this quarter.
Of course, none of this means the economy is healthy. It isn’t. Inflation remains way too high.
And none of this means the economy is out of the woods. It isn’t.
A recession remains a real risk, especially next year and in 2024 as the economy absorbs the full impact of the Federal Reserve’s monster interest rate hikes.
And it remains possible that the economy stumbles so much in the months ahead that economists at the National Bureau of Economic Research, the official arbiter of recessions, eventually declare that a recession began in early 2022. But for now, it’s way too early to say that’s the case.

Job market is still hot

The biggest issue in arguing that a recession has already begun is the fact that hiring ramped up — dramatically — in July. The United States added a staggering 528,000 jobs last month, returning payrolls to pre-Covid levels.
An economy that’s in recession doesn’t add half a million jobs in a single month.
“I don’t think anything in the data about where we are right now in the economy is consistent with what we typically think of as a recession,” Brian Deese, director of the White House National Economic Council, told CNN in a phone interview last week.
If anything, the job market is too hot. And that is a problem for the months ahead because it allows the Federal Reserve to aggressively raise interest rates without resulting in widespread damage to the labor market in its bid to slow the economy down.
The risk is that the Fed ends up slamming the brakes so hard that it slows the economy right into a recession.
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Inflation is cooling off, finally

There is a growing sense that perhaps the worst is over on the inflation front.
The biggest inflation headache — gasoline prices — is finally easing in a big way. The national average for regular gasoline has now plunged by more than $1 since hitting a record high of $5.02 a gallon in mid-June.
Beyond gasoline, diesel and jet fuel prices are also falling, easing inflationary pressure on the rest of the economy.
The energy cooldown lowered inflation metrics in July and should do the same, if not more so, in August.
The Bureau of Labor Statistics said last week that consumer prices were 8.5% higher in July than they were a year earlier. Although that remains alarmingly high, it is down from the 40-year high of 9.1% in June. And, month over month, prices were little changed.
Wholesale inflation may also be peaking. The producer price index, which measures prices paid to producers for their goods and services, decelerated in July by more than anticipated on a year-over-year basis. And PPI declined month over month for the first time since the economy was shut down in April 2020.
The better-than-expected inflation reports reflect not just lower energy prices but easing stress in supply chains scrambled by Covid-19.

What a recession would feel like

In some ways, the recession debate is semantics.
Recession or not, Americans are clearly hurting right now because the cost of living is too high. Real wages, adjusted for inflation, are shrinking. And although consumer sentiment as measured by the University of Michigan has climbed two months in a row, it remains near record lows.
However, for many, an actual recession would be far more painful than today’s environment.
A recession would likely involve the loss of not just hundreds of thousands but millions of jobs. Unable to make their mortgage payments, families would face foreclosure on their homes. And small, medium and large businesses would go under.
None of those things are happening in a significant way, at least not yet.
But flashing red lights in the bond market suggest that could change.
The yield curve — specifically, the gap between 2-year and 10-year Treasury yields — remains inverted. And in the past, this has been an eerily accurate predictor of recessions. It has preceded every recession since 1955.
In all, recent economic data suggests that the potential recession may have been delayed, not canceled altogether.
While the risk of a recession over the next six to nine months appears to have gone down, Zandi said, the risk of one in the next 12 to 18 months has gone up.
“Recession odds are still uncomfortably high,” he said.

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South Korea’s factory output falls in warning for global economy – Al Jazeera English

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Asia’s fourth-largest economy sees industrial output shrink a worse-than-expected 1.8 percent in August.

South Korea’s factory production fell for a second straight month in August, a warning sign for the global economy as it faces risks from the war in Ukraine to rising interest rates.

Asia’s fourth-largest economy saw industrial output shrink a worse-than-expected 1.8 percent on a seasonally-adjusted monthly basis after falling 1.3 percent in July, government figures showed on Friday.

Compared with the same month a year earlier, factory output rose 1.0 percent, the slowest pace since September 2021.

However, output for the services sector rose 1.5 percent on the month, while retail sales jumped 4.3 percent, the fastest gain since May 2020.

The figures follow a raft of data showing slowing factory output in other major Asian economies, including China, Japan and Taiwan.

China’s factory activity slowed further in September following a decline the previous month, as Beijing’s ultra-strict “zero COVID” policies hit production and sales, according to a private sector survey released on Friday.

South Korea, one of the world’s biggest manufacturers of cars, chips and ships, is seen as a barometer of the health of global trade as its companies span a vast swathe of the world economy.

South Korea’s exports, which account for nearly 40 percent of gross domestic product (GDP), are expected to slow sharply in September, with a survey of economists by the Reuters news agency predicting the slowest growth in nearly two years ahead of the release of official figures next month.

“This is certainly concerning for the domestic and global economy,” Min Joo Kang, senior economist for South Korea and Japan at ING, told Al Jazeera.

“The weaker than expected industrial production was driven by Korea’s main export items such as semiconductors and petrochemicals. This would have a negative impact on GDP for Korea for sure and also suggests global demand weakness. Usually it takes 4-5 quarters for semiconductors to come out of their downward cycle, thus the bottom hasn’t come yet.”

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German Economy Seen Shrinking Next Year Due to Energy Crisis – BNN Bloomberg

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(Bloomberg) — Germany’s economy will likely contract by 0.4% next year due to the impact of the energy crisis, according to the nation’s leading research institutes, who slashed their forecast from April of a 3.1% expansion.

German output will be €160 billion ($154 billion) lower this year and next than projected five months ago partly due to the drastic increase in energy costs, the four institutes predicted Thursday in a twice-yearly report which the government uses as guidance for its own outlook.

“The Russian attack on Ukraine and the resulting crisis on the energy markets are leading to a noticeable slump in the German economy,” said Torsten Schmidt, head of economic research at the RWI Institute and spokesman for the Joint Economic Forecast Project Group.

Germany is one of the countries hardest hit by the energy emergency triggered by the Ukraine war thanks to a reliance on Russian fuel imports built up over decades. Chancellor Olaf Scholz’s ruling coalition is racing to cut back that dependence but Germany still faces a tough winter with the prospect of gas rationing and blackouts.

The government has assembled three packages of aid measures worth nearly €100 billion to offset the impact on households and companies but has also cautioned that it doesn’t have the resources to ease the pain completely.

“Record inflation rates, especially exploding energy prices, are hitting many companies hard,” Martin Wansleben, managing director of the DIHK industry lobby, said Thursday in an emailed statement.

“The consequences are production stops, losses in value creation, the relocation of production abroad and even plant closures,” he added. “The number of companies that either do not receive any energy supply contracts at all or only receive them at extreme prices is currently increasing.”

Although the energy crunch is expected to ease over the medium term, gas prices are likely to remain well above pre-crisis levels, meaning “a permanent loss of prospe­rity for Germany,” the institutes warned.

They cut their growth estimate for this year to 1.4% from 2.7% and said they expect inflation to accelerate in coming months, climbing to an average rate of 8.8% next year — compared with 8.4% this year — before gradually falling back toward 2% in 2024.

Europe’s biggest economy will likely return to growth in 2024, with expansion of 1.9%, the institutes predicted.

The four institutes which compile the twice-yearly forecasts are Munich-Based Ifo, the IfW in Kiel, the IWH in Halle and the Essen-based RWI. The Wifo and the IHS institutes in Vienna also contribute. The government is expected to publish updated economic projections next month.

(Updates with industry lobby comment from sixth paragraph)

©2022 Bloomberg L.P.

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U.S. economy shrinks at 0.6% annual rate in Q2 – Advisor's Edge

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Consumer spending grew at a 2% annual rate, but that gain was offset by a drop in business inventories and housing investment.

The U.S. economy has been sending out mixed signals this year. Gross domestic product, or GDP, went backward in the first half of 2022. But the job market has stayed strong. Employers are adding an average 438,000 jobs a month this year, on pace to be the second-best year for hiring (behind 2021) in government records going back to 1940. Unemployment is at 3.7%, low by historic standards. There are currently about two jobs for every unemployed American.

But the Fed has raised interest rates five times this year — most recently Sept. 21 — to rein in consumer prices, which were up 8.3% in August from a year earlier despite plummeting gasoline prices. Higher borrowing costs raise the risk of a recession and higher unemployment. “We have got to get inflation behind us,” Fed Chair Jerome Powell said last week. “I wish there was a painless way to do that. There isn’t.”

The risk of recession — along with persistently and painfully high prices — poses an obstacle to President Joe Biden’s Democrats as they try to retain control of Congress in November’s midterm elections. However, drops in gasoline prices have improved consumers’ spirits in the past two months.

Thursday’s report was the Commerce Department’s third and final take on second-quarter growth. The first look at the economy’s July-September performance comes out Oct. 27. Economists, on average, expect that GDP returned to growth in the third quarter, expanding at a modest 1.5% annual pace, according to a survey by the data firm FactSet.

Commerce also on Thursday released revised numbers for past years’ GDP. The update showed that the economy performed slightly better in 2020 and 2021 than previously reported. GDP rose 5.9% last year, up from the previously reported 5.7%; and, pounded by the coronavirus pandemic, it shrank 2.8% in 2020, not as bad as the 3.4% previously on record.

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