“Will US Avoid Recession? In this article, we examine the most recent data from the Bureau of Labor Statistics (BLS) and analysis to provide a comprehensive overview of the current state of the US economy and explore how resilient is the US Economy to a downturn.
U. S. CONSUMER PRICE INDEX
On 12th January, 2023, the Bureau of Labor Statistics (BLS) has released its Consumer Price Index data for the Month of December, 2022.
According the BLS, US inflation for all items for the month of October has increased to 6.5 percent before seasonal adjustment.
Energy Index decreased by 4.5 percent compare to last month (i.e. November), as the gasoline index has declined while other major energy component indexes increased over the month.
The food index increased 0.3 percent over the month with the food at home index rising 0.2 percent.
The BLS stated that “The all items index increased 6.5 percent for the 12 months ending December; this was the smallest 12-month increase since the period ending October 2021.”
The Core inflation (i.e. all items minus food and energy index) rose by 5.7 percent over the last 12 months. Energy index alone has increased by 7.3 percent for the 12 months ending December, while the food index have increased by 10.4 percent over the last year. All of these increases are marginal for the 12-month period ending November.
Source: BLS, press release for December CPI Index
Source: BLS, press release for December CPI Index
US Inflation for December has come down to 6.5%. The Graph 2 clearly depicts that the core inflation is also slowing down in tandem with overall inflation.
Inflation and FOMC
It has to be noted that US has inflation targeting of 2 percent. Federal Reserve on 14th December, 2022, in their FOMC stated that “In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-1/4 to 4-1/2 percent.”
It further stated that “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May.”
The FOMC is committed to return inflation to its objective of 2 percent. The Committee continues to monitor the implications of incoming information for the economic outlook, before assessing the appropriate stance of monetary policy. The committee takes into account varied information including readings on labor market conditions, inflation pressures and inflation expectations, public health, and financial and international developments.
Key Takeaways From Inflation Data
As quoted in Brookings Edu Justin “Wolfers noted, wages have not risen as fast as prices throughout this entire inflation period.” Further quote “Workers have lost ground,” he said. “It’s quite possible for workers to catch up that ground without it feeding through to prices.”
This doesn’t mean unemployment may not be a problem; this only means that the wages and employments are not highly sensitive to the prevailing inflation. This also means that in no time the wages and employment can catch up with inflation.
What is more worrying is Food Inflation. This is still higher and there are no exact reasons known for the same.
Reports have shown there is increase in employment and low productivity. This raises question if there is increase in employment then where is the productivity. Well, there are sectors where productivity cannot be easily measured, for example, service sectors like hospitality. If employment has increased in those sectors then it may not be reflecting in productivity soon.
Other concern may be is Capital Stock. It is noted by many experts and analyst that the many commercial Buildings are still vacant. Many business are yet to figure out what kind of infrastructure works out post-pandemic across the country.
Will US Avoid Recession? Policymakers Walking A Tight Rope
The inflation coming down gives the Federal Reserve a space of hope to the FOMC for the next rate increase, which may be done with a pause if required. As almost all inflation is coming down.
Many of the Americans feel that the recession or the crisis will be abated in coming months as the Core inflation is around 3% in December. Now, this put policymakers, especially the FOMC and the Federal Reserve, in tight spot. The policymakers may see that inflation is still in elevated level, while the common man is not able to understand the same and feel that this little elevated inflation is required for economic activity. This puts them in such a tight spot and they should handle this with more care like having a mirror in hand while walking in a tight rope! Rate cuts may be inevitable for FOMC during this year but whether it will go for cut up to 100 bps as few researchers and experts claim, is entirely depends on the economic conditions of the coming months. It is important for FOMC to go for slow rate cut rather than quick rate cut, though inflation is slowing down rapidly.
Conclusion
Whether the United States will face recession in the second half of 2023 or will USA avoid recession is not completely dependent on policymakers but also on external factors such as consumer spending, global economic conditions, etc. While the US economy has shown resilience in the past, it is important for policymakers to closely monitor and respond to any signs of an impending recession. The future of the US economy is seems to be not so gloomy, but we need wait and watch how economy and investors responds to the prevailing conditions to avoid a recession and to maintain economic stability. We need to wait and watch how the policymakers handle this “Mirror of Recession”.
FAQ
What actions do policymakers take to prevent a recession?
Policymakers use their policy tools like Fiscal policies & Monetary policies in order to handle or prevent recession. These policies can stimulate economic growth & curb the potential for a recession.
How does consumer spending affect the likelihood of a recession?
Consumer spending is a key driver of economic growth & a decrease in consumer spending can signal an impending recession. When consumers spend less, businesses often earn less revenue & may need to cut jobs, leading to rising unemployment & lower economic growth. This is like viscious circle.
How does the global economy impact the US economy and the possibility of a recession?
The global economy can greatly impact the US economy & increase the possibility of a recession. Economic downturns in other countries can even lead to decreased demand for US exports and also a decrease in foreign investment in the US. Moreover, a global recession can also cause a decrease in commodity prices, which is likely to negatively impact US industries that rely on them.
How does the government’s fiscal and monetary policy play a role in avoiding a recession?
The government’s uses its Fisccal policy for stimulating demand by increasing their spending and reducing the taxation,by stimulating the demand the economic activity is stimulated and leads to economic growth & thus avoid a recession.
In terms of Monetary policy, the Central Bank of the country uses its monetary tools like Interest rates etc.. to not only curb inflation but also stabilize the economy by encouraging the investors and markets. By doing so they can stimulate the economy and put it back on growth path.
How do small businesses and entrepreneurs fare during a recession?
Small businesses & entrepreneurs can be hit hard during a recession, as they may have less access to credit & may struggle to maintain revenue as consumer spending decreases. However, some small businesses may be able to adapt and even thrive during a recession by offering lower prices or unique products & services.