Federal Reserve Chairman Jerome Powell reacts as he addresses a hearing of the Senate Committee on Banking, Housing and Urban Affairs on the Semiannual Monetary Policy Report to the Congress on Capitol Hill in Washington, DC, May 22. June 2022 testifies.
Elisabeth Franz | Reuters
A US Federal Reserve economic growth tracker indicates an increased likelihood of the US economy entering a recession.
Most Wall Street economists have pointed to an increased likelihood of negative growth going forward, but don’t expect it to happen until at least 2023.
However, the Atlanta Fed’s GDPNow gauge, which tracks real-time economic data and continually adjusts it, sees output contracting 1% in the second quarter. Combined with the 1.6% decline in the first quarter, that would fit the technical definition of a recession.
“GDPNow has a strong track record and as we get closer to its July 28 release [of the initial Q2 GDP estimate] the more accurate it gets,” wrote Nicholas Colas, co-founder of DataTrek Research.
The tracker posted a fairly steep decline from its last estimate of 0.3% growth on June 27. Data this week showing further weakness in consumer spending and inflation-adjusted domestic investment led to the cut that pushed the April-June period into negative territory.
A big change during the quarter was rising interest rates. In a bid to curb rising inflation, the Fed has raised interest rates by 1.5 percentage points since March, with further hikes expected later this year and perhaps into 2023.
Fed officials have expressed optimism that they will be able to tame inflation without sending the economy into recession. However, Chair Jerome Powell said earlier this week that bringing inflation down was now the top priority.
At a panel earlier this week presented by the European Union, Powell was asked what he would say to the American people about how long it will take for monetary policy to cope with the rising cost of living.
He said he will tell the public: “We fully understand and appreciate the pain people are going through in dealing with the higher inflation, that we have the tools to counter it and the determination to use them and that we will work and succeed in bringing inflation down to 2%. There will most likely be some pain in the process, but the worst pain would be if you don’t address this high inflation and allow it to continue.”
It is not known whether this will turn into a recession. The National Bureau of Economic Research, the official arbiter of recessions and expansions, notes that two consecutive quarters of negative growth are not necessary to declare a recession. However, there has never been a case since World War II when the US has contracted for consecutive quarters and not been in a recession.
Of course, this tracker can be volatile and fluctuate with each data release. However, Colas noted that the GDPNow model is becoming more accurate as the quarter progresses.
“The long-term track record of the model is excellent,” he said. “Since the Atlanta Fed first began running the model in 2011, their average error has been just -0.3 points. From 2011 to 2019 (excluding the economic volatility related to the pandemic), their tracking error averaged zero.”
He also noted that US Treasury yields have taken note of the slower growth outlook and have fallen significantly over the past two weeks.
“Equities have taken no solace from the recent drop in yields as they face the same problem portrayed in GDPNow data: a US economy that is cooling rapidly,” added Colas.