Written By: Rodney Johnson of The Rodney Johnson Report
June 14, 2022
The way inflation is heading suggests a recession, yet this isn't terrible news for the economy. Find out why this might be for the best for our society today.
The National Bureau of Economic Research (NBER) is the official arbiter of U.S. recessions, but the private entity doesn’t publish a clear mathematical formula for how recessions are identified. A generally accepted definition is two consecutive quarters of falling real GDP growth. If we go with that, then we’re halfway there.
Real GDP growth fell 1.5% in the first quarter, and the second quarter isn’t looking too healthy. The Atlanta Federal Reserve Bank’s GDPNow model estimates real second-quarter growth at a mere 0.9%, and that forecast has been falling for weeks. It’s easy to see how we might get another quarter of negative real growth. If that happens, and we enter a technical recession, it could be the “best” downturn we’ve ever had, and inflation would be the reason.
The current bout of inflation is running much hotter than anyone expected. Many analysts thought the stimulus payments and demands for higher wages would lead to inflation, but few if any thought those pressures would push inflation anywhere close to 8%, and certainly would not push it over that level. To get numbers that high took something as unexpected and seemingly outrageous as Russia invading Ukraine and the ensuing Western sanctions. To arrive at real GDP growth numbers, we subtract inflation from nominal GDP growth.
In the first quarter, economic growth expanded by 6.5%, which is great! But 8% inflation meant that real GDP growth came in at -1.5%. With second-quarter inflation averaging about 8.25%, the current GDPNow estimate of 0.9% real GDP growth in the second quarter means that nominal growth should be 9.15%. Again, that’s a huge number. Our economy is shooting higher even as we deal with high inflation. This is why the NBER might not call this a recession even if we get another quarter of negative real growth. It’s hard to think of the economy as being in rough shape when unemployment sits at 3.6% and demand remains strong, which brings up the reason why this technical recession, if we get one, could be quite shallow. We’re still working.
For the Fed to reduce demand significantly through higher interest rates, it would have to reduce demand for housing and cars dramatically, but we’re already starting at modest levels. Existing homes sales, which account for 90% of all sales, fell to 5.6 million units last month, or about the annual average for 2016 through 2019. Auto sales remain depressed because of the chip shortage. We’re tracking to sell around 14 million vehicles in the U.S. this year, several million less than in 2019, before the pandemic. That’s a good thing, because if the Fed dramatically reduced demand in these areas, it would drive up unemployment. Without paychecks, people don’t spend, which could cause a recession.
While this might be the “best” recession we ever live through, that doesn’t mean it’s not painful. The high inflation that is driving down real GDP growth also is affecting our daily lives. Average hourly earnings increased 5.6% over the past year but are down 3% on an inflation-adjusted basis. High prices are cutting into our standard of living, which is not a good thing.
For more information regarding the economy in terms of the dollar's impact on it, watch this video from Rodney Johnson
For more information on the economy, specifically in terms gas and oil prices, click this link provided by Truckload Indexes:
Diesel prices: The loss of US refining capacity is making things worse - FreightWaves
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