The rate of economic growth in the United States has slowed, and manufacturing has entered a slump. Outside of the United States, growth is slow and appears to be dropping even more.
In what some have dubbed an earnings recession, corporate earnings decreased in 2015 and 2016. Similarly, typical company earnings are lower than they were a year ago.
Several of the warning signs of impending recession are now flashing yellow or red flags. Industrial production has been extremely low once again. The yield curve shifted to the right. Business investment is still at an all-time low.
Why is the US economy contracting this year?
The U.S. economy is expected to grow at a slightly above-average rate in 2017, according to participants in the Chicago Fed’s annual Economic Outlook Symposium, with inflation rising and the unemployment rate remaining low.
On December 2, 2016, the Federal Reserve Bank of Chicago presented its 30th annual Economic Outlook Symposium (EOS). The meeting drew approximately 100 economists and analysts from business, academia, and government. The forecasts for 2016 from the previous EOS are reviewed in this Chicago Fed Letter, followed by an analysis of the forecasts for 2017 (see figure 1) and a summary of the presentations from the most recent EOS.
In the third quarter of 2016, the US economy reached its eighth year of boom. While the country’s actual gross domestic product (GDP) is at an all-time high, the rate of economic growth since the Great Recession ended in mid-2009 has been extremely slow. The annualized rate of real GDP growth in the 29 quarters following the second quarter of 2009 was 2.1 percent, just slightly higher than what is considered the long-term pace of growth for the US economy. Furthermore, for the first three quarters of 2016, the annualized rate of real GDP growth was 0.2 percentage points lower than the current expansion’s average.
Weak investment (both business and residential) and government spending were the major drags on economic growth in 2016. In the first three quarters of 2016, real business fixed investment fell by 0.4 percent on an annualized basis. Moderate growth in the overall economy, excess capacity in the industrial sector, the collapse of energy prices lowering investment in this sector, the strong international value of the US dollar, and economic uncertainty during this past presidential election year could all be factors in the poor performance. After expanding at an annualized pace of 9.4% between the third quarter of 2010 and the final quarter of 2015, real residential investment declined by 1.6 percent in the first three quarters of 2016. Despite the drop in residential spending, the annualized pace of home starts grew to 1.16 million units in the first 11 months of 2016, an increase of 5.4 percent over the same period in 2015. During the first three quarters of 2016, real government spending expanded at an annualized pace of 0.2 percent, significantly below the 1.2 percent averaged over the previous 20 years.
Median forecasts of real gross domestic product and related items
In 2016, energy costs remained relatively low. In the fourth quarter of 2016, the price of West Texas Intermediate oil averaged $49 per barrel, up from $42 in the fourth quarter of 2015 but still significantly below the almost $80 per barrel it averaged in the 10 years leading up to the oil price crash in the middle of 2014.
Last year, consumer expenditure grew at a healthy rate: During the first three quarters of 2016, real personal consumption expenditures climbed at an annualized rate of 3.0%. Light vehicle sales (cars and light trucks) in particular remained strong in 2016, reaching a new high of 17.5 million units. Because energy prices remained low in 2016, more buyers chose to buy larger, less fuel-efficient automobiles than the previous year: In 2016, light truck sales (including sport utility vehicles) increased by 7.1 percent over the previous year, while passenger car sales decreased by 8.5 percent. Because of this remarkable shift in customer demand, light trucks accounted for a record-breaking 60.6 percent of all light vehicle sales in 2016.
Against this context, the economy continued to add jobs in 2016, with 2.16 million new positions added last year. Furthermore, in the fourth quarter of 2016, the unemployment rate was 4.7 percent, which is typically linked with full employment. Other labor market indicators, on the other hand, show that slack is still present. For example, by historical standards, there are still an unusually big number of part-time workers who want full-time work and a sizable percentage of unemployed workers who have been unemployed for more than six months.
By November 2016, inflation, as measured by the Consumer Price Index (CPI), has risen from an extraordinarily low 0.4 percent in 2015 to a still-low year-over-year rate of 1.7 percent.
Results versus forecasts
According to the consensus forecast from the most recent EOS, real GDP growth in the fourth quarter of 2016 will be 1.8 percent compared to the fourth quarter of 2015, which is lower than the 2.6 percent rate expected at the previous EOS. (For the remaining GDP component comparisons, annual numbers are determined using the most recent EOS consensus estimates for the fourth quarter of 2016.) While real personal consumption expenditures grew at a rate that was fairly near to expectations, real business fixed investment and real residential investment grew at far slower rates. In the fourth quarter of 2016, the unemployment rate was 4.7 percent, 0.2 percentage points lower than the amount projected for the fourth quarter of 2016. Inflation, as measured by the Consumer Price Index (CPI), is now estimated to be 1.4 percent in 2016, down 0.5 percentage points from the previous forecast of 1.9 percent. In the fourth quarter of 2016, the actual average price of oil was $49.20 per barrel, which was lower than the expected average price of $53.25 per barrel. In 2016, light vehicle sales totaled 17.5 million units, slightly less than the 17.6 million predicted. For the first 11 months of 2016, the annualized rate of house starts was 1.16 million units, hence total housing starts in 2016 are projected to fall short of the 1.24 million units previously forecast. In the fourth quarter of 2016, the one-year Treasury rate rose to 0.76 percent, well below the 1.04 percent expected. Instead of rising to the expected rate of 2.70 percent, the ten-year Treasury rate fell to 2.13 percent by the end of 2016.
Economic outlook for 2017
The pace of economic growth in 2017 is expected to be slightly faster than the long-term average. The real GDP growth rate for 2017 is estimated to be 2.2 percent, up from the 1.8 percent rate projected for 2016. The quarterly trend demonstrates a reasonably consistent real GDP growth performance throughout 2017. Given that economic growth is likely to be just slightly over its historical average, the unemployment rate in the fourth quarter of 2017 is expected to be 4.8 percent. Inflation, as measured by the Consumer Price Index (CPI), is expected to rise from 1.4 percent in 2016 to 2.0 percent in 2017. Oil prices are expected to rise, but stay relatively low; in the fourth quarter of 2017, they are expected to average $51.53 per barrel. In 2017, real personal consumption expenditures are expected to grow by 2.3 percent. This year, light vehicle sales are forecast to drop to 17.3 million units. In 2017, real business fixed investment growth is expected to rise to a healthy 3.2 percent. This year, industrial production is expected to expand at a rate of 1.9 percent, which is lower than the historical average.
In 2017, the housing market is expected to strengthen and continue its slow but steady return to normalcy. In 2017, real residential investment is expected to expand at a robust 4.5 percent annual rate. And, while home starts are expected to increase to 1.20 million units in 2017, they will still be considerably below the 20-year annual average of around 1.32 million.
In 2017, the one-year Treasury rate is anticipated to increase to 1.33 percent, while the ten-year Treasury rate will rise to 2.36 percent. The trade-weighted US dollar is expected to gain another 4.7 percent in 2017, bringing the country’s trade imbalance (i.e., net exports of goods and services) to $563.5 billion by the fourth quarter of 2017.
Consumer and banking outlook
Northern Trust’s executive vice president and top economist, Carl Tannenbaum, shared his predictions for consumers and the banking industry. To understand some Americans’ current dissatisfaction with the economy, Tannenbaum emphasized the importance of looking “below the surface” of headline economic data. According to a Gallup poll, one of the most pressing worries for Americans today is the state of the economy. Tannenbaum highlighted many economic indicators for the United States to explain this survey result. Tannenbaum began by identifying some promising trends. According to him, the recovery from the Great Recession is progressing nicely, though at a modest pace. Since the financial crisis, consumers have reined in their spending and restored their balance sheets, boosting their savings rate to slightly under 6% of disposable income (a healthy rate, according to Tannenbaum). In comparison to 2009, when the Great Recession ended, unemployment is significantly lower. Although the official unemployment rate has returned to pre-recessionary levels, there is still opportunity for improvement when marginally attached workers and those working part-time for financial reasons are taken into account. Tannenbaum explained that, on the whole, consumers have felt optimistic enough about the overall economy and their personal financial situations to increase their spending in recent years, citing increases in real personal consumption expenditures and the Conference Board’s Consumer Confidence Index.
When it comes to negative tendencies, Tannenbaum points out that residual debt is still a huge concern. Student loan debt, for example, continues to climb, impeding family formation. Furthermore, despite the fact that the housing market has been rebounding, about 12% of Americans with single-family home mortgages are still underwater. This, according to Tannenbaum, may be preventing job vacancies in particular labor markets from being filled since potential workers are unable to sell their houses and relocate for work. According to Tannenbaum, persons with at least a bachelor’s degree have seen bigger improvements in employment and income during the current economic expansion than those with lower levels of education. Furthermore, those in the bottom half of the income distribution are far more likely to lose their jobs, according to him. Tannenbaum cited the government debt and deficit, rising health-care expenses, and the negative repercussions of potentially decreasing trade with foreign countries as examples of the difficult economic situations Americans confront now.
When it comes to the banking industry, Tannenbaum has noticed that bank stocks have been performing well and that lending has increased. The nation’s largest banks, according to Tannenbaum, are properly capitalized, in part due to obligatory Federal Reserve stress testing, which examines how well these institutions would deal in the event of a future catastrophe. 1 Furthermore, credit circumstances are favorable (for example, borrowing costs are historically low), he added. Low interest rates, on the other hand, are causing public pension systems to struggle, as pension debt continues to climb and pension funding ratios (assets-to-liabilities ratios) decline. Low interest rates, according to Tannenbaum, may encourage some investors to “seek for yield” by investing in less well-known and riskier assets than government bonds. Tannenbaum, on the other hand, was upbeat about the banking sector’s near-term prospects.
Automotive industry outlook
Michael Robinet, managing director, IHS Markit’s automotive advisory solutions, gave his take on the industry. Global light vehicle production is predicted to rise from 91.4 million units in 2016 to 92.8 million units in 2017, according to Robinet. From 2016 through 2023, auto production is predicted to grow at a 2.2 percent yearly rate. He pointed out that, while the automobile industry has been a major engine of global economic activity in recent years, it is now likely to grow at a slower pace. From 2009 to 2015, worldwide light vehicle production climbed by around 29 million units, or about 50%, following the Great Recession. From 2016 to 2023, he expects auto output to rise by almost 17 million units, according to him. According to Robinet, the world’s two most populous economies are the key drivers of this forecast increase: China is expected to contribute for roughly 40% of the growth, and India for around 30%. Because of political and economic concerns, Europe’s auto industry has not contributed as much to global expansion in light vehicle production as it has in the past (e.g., the Greek debt crisis and Brexit). However, in the future, European auto production should play a larger role. Finally, he predicted that the subcompact and compact sectors will expand the most internationally over the prediction period.
In North America, Robinet expects annual light vehicle manufacturing to reach 18 million units in 2017 and 18.6 million units by 2023, according to his projections. Light vehicle sales in the United States are expected to peak in 2017 at 17.5 million units (up from the symposium’s consensus median forecast of 17.3 million units) and then progressively fall through 2023. According to Robinet, vehicle prices have risen as a result of inflation, new laws (such as those aimed at improving safety and fuel efficiency), and the integration of market-driven features (such as integrated Internet connectivity).
Finally, Robinet examined trends in North American auto production geography, as well as the transition toward new vehicle technologies that enhances fuel efficiency. Much of the sector is expected to continue to relocate to Mexico, owing to cheaper costs associated with shipping vehicles to end markets and inventory holding. Mexico, which is already a major vehicle exporter, will continue to expand its auto manufacturing capacity in the coming years. In terms of fuel-saving technology, Robinet predicts that automated rapid startstop systems for internal combustion engines (which reduce engine idling time) and the adoption of mild or full hybrid drivetrains will become more common in the future. Beyond 2020, Robinet envisions considerably more electrification of autos (including more cars that run entirely on electricity) than there is now.
Steel industry outlook
After a year in which overall steel consumption in the United States was down somewhat, Robert DiCianni, manager of marketing and analysis at ArcelorMittal USA, expressed optimism for the steel sector in 2017. Domestic steel consumption fell 1% to 105 million tons in 2016, compared to the previous year. Following a tiny fall in activity in 2015, nonresidential building, the largest end market for steel, rose modestly in 2016. Furthermore, in 2016, industrial production (including mining and utilities) declined, lowering steel demand. For example, the energy industry, which relies heavily on steel for extraction and transportation of oil and gas, reduced its steel usage by almost 3.5 million tons. Steel service centers, which act as a link between steel producers and end users, have sold off their stock, he added. Steel inventories have been at an all-time low since 2015. The capacity utilization2 of the US steel sector is below its long-term trend of 70%, which DiCianni believes is attributable to service centers not being in the market for steel. Over the last year or two, the steel market has been sluggish or tepid on the entire. DiCianni did say, though, that he believes the steel industry would have a better year in 2017. Steel consumption in the United States is likely to increase by about 3% in 2017, to 108 million tons, according to his prediction (lower than the 120 million tons that are consumed in a normal good year). Steel consumption in nonresidential construction is expected to rise by 6% in 2017, resulting in an increase of 1.2 million tons in demand. Steel use in the energy industry is forecast to rise by around 2 million tons this year. Steel should maintain its market dominance over other metals used in auto manufacture, such as aluminum, despite auto sales being flat or slightly down in 2017, he said. Steel inventories will begin to replenish in the first quarter of 2017, he said.
In 2017, global steel consumption is expected to increase by 0.5 percent to 1.51 billion metric tons. Steel consumption in North America and Europe is expected to rise by 2.9 percent and 1.4 percent, respectively. China’s steel consumption, on the other hand, is predicted to fall by 2%, reflecting the country’s sluggish economic growth. DiCianni pointed out that one trend in the global steel sector is an increase in steel prices, which is partially attributable to a rise in global steel demand and international trade rules that have reduced steel supply in some countries.
Heavy machinery outlook
Caterpillar’s regional chief economist for the Americas, Deanne Short, offered a favorable view for the heavy machinery industry. Short began by saying that the International Monetary Fund expects global real GDP growth to be 2.8 percent in 2017. She pointed out that when global real GDP growth exceeds 2.7 percent, heavy machinery sales often expand faster. According to Short, the North American heavy machinery industry will see some growth in 2017 due to a number of variables. Housing starts in the United States increased dramatically in October 2016, and modest increases in both housing permits and starts are predicted in 2017, she said. Furthermore, the Housing Affordability Index of the National Association of Realtors is considerably above 100, indicating that conditions are quite favorable for home buying. Short stated that, based on historical year-over-year variations in both residential and commercial real estate lending, credit is currently plentiful and not suffocating demand. Following the late-2015 enactment of the FAST Act3, spending on highways, streets, and other transportation infrastructure is likely to rise in 2017. Short also said that several state and local referendums were recently passed to boost infrastructure projects, but the economic benefit of these projects may not be noticed until 2018. Furthermore, the effects of any new big publicprivate partnership agreements for infrastructure projects may not be visible until 2019 or later. All of these recent improvements and expectations, according to Short, bode well for future heavy machinery sales.
Short stated that capacity utilization in the mining, oil, and gas industries has decreased, which is a bearish omen for future heavy machinery sales. Mining, according to Short, will remain depressed in 2017. She did, however, mention that the global mining industry’s earnings margins and capital expenditures have started to improve, which speaks well for heavy machinery sales beyond 2017.
Heavy machinery equipment consumption has been declining outside of North America in recent years, according to Short. This is most likely due to the mounting difficulties of China’s economic and financial reforms, surplus supply of some metal commodities (which has pushed down prices), and numerous political upheavals throughout the world. Heavy machinery sales outside of North America, however, are nearing a bottom, according to Short, and will likely begin to climb again in 2017.
Covering Chicago manufacturing from high above
Kris Habermehl, an airborne reporter for WBBM-AM (a Chicago-based all-news radio station), showed helicopter footage from the 1990s and early 2010s of Chicago’s Calumet Harbor. Habermehl discussed different vessels that have sailed Lake Michigan and docked at the harbor, as well as surrounding industrial production sites. He claims that a large portion of the industrial space has been repurposed or converted to green space. Habermehl stated that he wanted to provide a historical perspective on how things were done in the past, as well as how they are done more efficiently today, in his manufacturing reporting.
Conclusion
The US economy grew at a rate that was substantially in line with the historical average in 2016. The economy is expected to expand at a somewhat quicker rate in 2017 than it did in 2016. In 2017, business investment and the housing market are expected to rebound. By the end of 2017, the unemployment rate is forecast to be 4.8 percent, with inflation expected to reach 2%.
1 See https://www.federalreserve.gov/bankinforeg/dfa-stress-tests.htm for additional information on Federal Reserve stress testing for big bank holding companies.
2 Capacity utilization is calculated by dividing the actual output produced by installed equipment by the potential output that could be produced if it were used to its full capacity.
3 See https://www.transportation.gov/fastact for more information on the FAST (Fixing America’s Surface Transportation) Act.
When was the last time the United States was in a recession?
The Great Recession lasted from December 2007 to June 2009, making it the longest downturn since World War II. The Great Recession was particularly painful in various ways, despite its short duration. From its peak in 2007Q4 to its bottom in 2009Q2, real gross domestic product (GDP) plummeted 4.3 percent, the greatest drop in the postwar era (based on data as of October 2013). The unemployment rate grew from 5% in December 2007 to 9.5 percent in June 2009, before peaking at 10% in October 2009.
The financial repercussions of the Great Recession were also disproportionate: home prices plummeted 30% on average from their peak in mid-2006 to mid-2009, while the S&P 500 index dropped 57% from its peak in October 2007 to its trough in March 2009. The net worth of US individuals and charity organizations dropped from around $69 trillion in 2007 to around $55 trillion in 2009.
As the financial crisis and recession worsened, worldwide policies aimed at reviving economic growth were enacted. Like many other countries, the United States enacted economic stimulus measures that included a variety of government expenditures and tax cuts. The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 were two of these projects.
The Federal Reserve’s response to the financial crisis varied over time and included a variety of unconventional approaches. Initially, the Federal Reserve used “conventional” policy actions by lowering the federal funds rate from 5.25 percent in September 2007 to a range of 0-0.25 percent in December 2008, with the majority of the drop taking place between January and March 2008 and September and December 2008. The significant drop in those periods represented a significant downgrading in the economic outlook, as well as increasing downside risks to output and inflation (including the risk of deflation).
By December 2008, the federal funds rate had reached its effective lower bound, and the FOMC had begun to utilize its policy statement to provide future guidance for the rate. The phrasing mentioned keeping the rate at historically low levels “for some time” and later “for an extended period” (Board of Governors 2008). (Board of Governors 2009a). The goal of this guidance was to provide monetary stimulus through lowering the term structure of interest rates, raising inflation expectations (or lowering the likelihood of deflation), and lowering real interest rates. With the sluggish and shaky recovery from the Great Recession, the forward guidance was tightened by adding more explicit conditionality on specific economic variables such as inflation “low rates of resource utilization, stable inflation expectations, and tame inflation trends” (Board of Governors 2009b). Following that, in August 2011, the explicit calendar guidance of “At least through mid-2013, the federal funds rate will remain at exceptionally low levels,” followed by economic-threshold-based guidance for raising the funds rate from its zero lower bound, with the thresholds based on the unemployment rate and inflationary conditions (Board of Governors 2012). This forward guidance is an extension of the Federal Reserve’s conventional approach of influencing the funds rate’s current and future direction.
The Fed pursued two more types of policy in addition to forward guidance “During the Great Recession, unorthodox” policy initiatives were taken. Credit easing programs, as explored in more detail in “Federal Reserve Credit Programs During the Meltdown,” were one set of unorthodox policies that aimed to facilitate credit flows and lower credit costs.
The large scale asset purchase (LSAP) programs were another set of non-traditional policies. The asset purchases were done with the federal funds rate near zero to help lower longer-term public and private borrowing rates. The Federal Reserve said in November 2008 that it would buy US agency mortgage-backed securities (MBS) and debt issued by housing-related US government agencies (Fannie Mae, Freddie Mac, and the Federal Home Loan banks). 1 The asset selection was made in part to lower the cost and increase the availability of finance for home purchases. These purchases aided the housing market, which was at the heart of the crisis and recession, as well as improving broader financial conditions. The Fed initially planned to acquire up to $500 billion in agency MBS and $100 billion in agency debt, with the program being expanded in March 2009 and finished in 2010. The FOMC also announced a $300 billion program to buy longer-term Treasury securities in March 2009, which was completed in October 2009, just after the Great Recession ended, according to the National Bureau of Economic Research. The Federal Reserve purchased approximately $1.75 trillion of longer-term assets under these programs and their expansions (commonly known as QE1), with the size of the Federal Reserve’s balance sheet increasing by slightly less because some securities on the balance sheet were maturing at the same time.
However, real GDP is only a little over 4.5 percent above its prior peak as of this writing in 2013, and the jobless rate remains at 7.3 percent. With the federal funds rate at zero and the current recovery slow and sluggish, the Federal Reserve’s monetary policy plan has evolved in an attempt to stimulate the economy and meet its statutory mandate. The Fed has continued to change its communication policies and implement more LSAP programs since the end of the Great Recession, including a $600 billion Treasuries-only purchase program in 2010-11 (often known as QE2) and an outcome-based purchase program that began in September 2012. (in addition, there was a maturity extension program in 2011-12 where the Fed sold shorter-maturity Treasury securities and purchased longer-term Treasuries). Furthermore, the increasing attention on financial stability and regulatory reform, the economic consequences of the European sovereign debt crisis, and the restricted prospects for global growth in 2013 and 2014 reflect how the Great Recession’s fallout is still being felt today.
When did the United States enter a recession?
The Great Recession, the longest and most disastrous economic downturn since the Great Depression, was part of a worldwide financial disaster caused by the burst of the housing bubble in the United States.
The financial house of cards created on the subprime mortgage industry caused the Great Recession. Mortgage-backed securities were heavily invested in by large financial institutions. When homeowners defaulted on such high-risk mortgages, not only did they lose their houses, but major investment firms such as Bear Stearns and Lehman Brothers were on the edge of failing.
The stock market was rocked by the dual housing banking crises, with major indices like the S&P 500 and Dow Jones Industrial Average losing half of their value, destroying the retirement funds of millions of Americans.
What is the state of the US economy in 2021?
Indeed, the year is starting with little signs of progress, as the late-year spread of omicron, along with the fading tailwind of fiscal stimulus, has experts across Wall Street lowering their GDP projections.
When you add in a Federal Reserve that has shifted from its most accommodative policy in history to hawkish inflation-fighters, the picture changes dramatically. The Atlanta Fed’s GDPNow indicator currently shows a 0.1 percent increase in first-quarter GDP.
“The economy is slowing and downshifting,” said Joseph LaVorgna, Natixis’ head economist for the Americas and former chief economist for President Donald Trump’s National Economic Council. “It isn’t a recession now, but it will be if the Fed becomes overly aggressive.”
GDP climbed by 6.9% in the fourth quarter of 2021, capping a year in which the total value of all goods and services produced in the United States increased by 5.7 percent on an annualized basis. That followed a 3.4 percent drop in 2020, the steepest but shortest recession in US history, caused by a pandemic.
What is the state of the economy in 2021?
“While Omicron will slow growth in the first quarter, activity is projected to pick up nicely once the newest pandemic wave has passed and supply-chain issues have been resolved,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.
“As it navigates underlying economic strength, rising labor shortages, and stubbornly high inflation, the Fed will need to remain ‘humble and flexible.'”
The economy increased at its fastest rate since 1984 in 2021, with the government providing roughly $6 trillion in epidemic relief. In 2020, it shrank by 3.4 percent, the most in 74 years.
President Joe Biden swiftly claimed credit for the outstanding performance, calling it “no accident.”
After Congress failed to approve his key $1.75 trillion Build Back Better legislation, Biden’s popularity is declining amid a stalled domestic economic plan.
In a statement, Biden said, “We are finally building an American economy for the twenty-first century, and I urge Congress to keep this momentum going by passing legislation to make America more competitive, strengthen our supply chains, strengthen our manufacturing and innovation, invest in our families and clean energy, and lower kitchen table costs.”
According to the government’s advance GDP estimate, gross domestic product increased at a 6.9% annualized pace in the fourth quarter. This follows a third-quarter growth rate of 2.3 percent.
However, by December, the impetus had dissipated due to an assault of COVID-19 infections, spurred by the Omicron variety, which contributed to lower expenditure and disruption at factories and service organizations. However, there are hints that infections have peaked, which could mean a surge in service demand by spring.
Inventory investment surged by $173.5 billion, accounting for 4.90 percentage points of GDP growth, the highest level since the third quarter of 2020. Since the first quarter of 2021, businesses have started reducing inventories.
During the epidemic, people’s spending shifted from services to products, putting a strain on supply systems. GDP rose at a sluggish 1.9 percent rate, excluding inventories.
On Wall Street, stocks were trading higher. Against a basket of currencies, the dollar rose. Treasury yields in the United States have fallen.
The minor increase in so-called final sales was interpreted by some economists as a sign that the economy was about to decline severely, especially if not all of the inventory accumulation was planned. They were also concerned that rate hikes and diminished government aid, particularly the elimination of the childcare tax credit, would dampen demand.
“Fed policymakers will have to tread carefully when raising interest rates,” said Christopher Rupkey, chief economist at FWDBONDS in New York. “Every other Federal Reserve in history has raised interest rates too high and brought the economy crashing back down.”
Last quarter’s growth was also boosted by a surge in consumer spending in October, before falling sharply as Omicron raged. Consumer expenditure, which accounts for more than two-thirds of GDP, increased by 3.3 percent in the fourth quarter after increasing by 2.0 percent in the previous quarter.
Increases in spending on healthcare, membership clubs, sports centers, parks, theaters, and museums balance a decline in purchases of motor vehicles, which are scarce due to a global semiconductor shortage.
Inflation rose at a 6.9% annual pace, the fastest since the second quarter of 1981, far beyond the Federal Reserve’s target of 2%. As a result, the amount of money available to households fell by 5.8%, limiting consumer expenditure.
Households were still buffered by large savings, which totaled $1.34 trillion. Wages increased by 8.9% before accounting for inflation, indicating that the labor market is experiencing a severe labor shortage, with 10.6 million job opportunities at the end of November.
Though the job market slowed in early January as Omicron rose, it is now at or near full employment. Initial jobless claims fell 30,000 to a seasonally adjusted 260,000 in the week ending Jan. 22, according to a second Labor Department report released on Thursday.
Claims decreased dramatically in Illinois, Kentucky, Texas, New Jersey, New York, and Pennsylvania.
Last quarter’s GDP growth was aided by a resurgence in corporate equipment spending. Government spending, on the other hand, has decreased at the federal, state, and municipal levels.
After being a drag on GDP growth for five quarters, trade made no contribution, while homebuilding investment fell for the third quarter in a row. Expensive building materials are constraining the sector, resulting in a record backlog of homes yet to be built.
Despite the economy’s difficulties at the start of the year, most experts predict the good luck will continue. This year’s growth forecasts are at least 4%.
“This year, the economy could be even better,” said Scott Hoyt, a senior economist with Moody’s Analytics in West Chester, Pennsylvania. “The economy will stagnate, and monthly employment increases will fall short of last year’s high levels. Nonetheless, by the end of the year, the economy should be close to full employment and inflation should be close to the Fed’s target.”
(Paragraph 7 was removed from this story because it contained incorrect information.)
Is the US economy slowing down?
Despite persistent labor market problems, the US economy is now larger than it was before the epidemic, growing at an annualized rate of 6.7 percent in the second quarter of 2021.
What was the recession of 2001 like?
The 2001 recession was an eight-month economic slowdown that lasted from March to November. 1 While the economy began to recover in the fourth quarter of that year, the effects lingered, and national unemployment rose to 6% in June 2003.
What caused the recession of 2018?
This week has seen a 180 degree turn, with the S&P 500 climbing 2% on Tuesday for its largest gain since March. On Friday, the VIX volatility index climbed above 30 for the first time since the beginning of the year.
But make a note of it on your calendar. Lindsey Bell, Ally Invest’s chief markets and money strategist, said two major economic events could increase volatility during an already volatile period.
According to Bell, the current volatility has brought back memories of a December three years ago. In December 2018, the S&P 500 plunged more than 9% as investors worried about a central bank poised to tighten monetary policy, a slowing economy, and escalating trade tensions between the US and China. The month of December was the worst since 1931.
“It’s very similar to what you’re witnessing today,” Bell said, “the Fed sounding the alarm that inflation isn’t as transitory as they anticipated, that it may be here to stay, and that they’re willing to act as the job market recovers.”
What caused the recession of 1981?
The 1981-82 recession was the greatest economic slump in the United States since the Great Depression, prior to the 2007-09 recession. Indeed, the over 11% unemployment rate attained in late 1982 remains the postwar era’s pinnacle (Federal Reserve Bank of St. Louis). During the 1981-82 recession, unemployment was widespread, but manufacturing, construction, and the auto industries were especially hard hit. Despite the fact that goods manufacturers accounted for only 30% of overall employment at the time, they lost 90% of their jobs in 1982. Manufacturing accounted for three-quarters of all job losses in the goods-producing sector, with unemployment rates of 22% and 24%, respectively, in the home building and auto manufacturing industries (Urquhart and Hewson 1983, 4-7).
The economy was already in poor health prior to the slump, with unemployment hovering at 7.5 percent following a recession in 1980. Tight monetary policy in an attempt to combat rising inflation sparked both the 1980 and 1981-82 recessions. During the 1960s and 1970s, economists and politicians thought that raising inflation would reduce unemployment, a tradeoff known as the Phillips Curve. In the 1970s, the Fed used a “stop-go” monetary strategy, in which it alternated between combating high unemployment and high inflation. The Fed cut interest rates during the “go” periods in order to loosen the money supply and reduce unemployment. When inflation rose during the “stop” periods, the Fed raised interest rates to lessen inflationary pressure. However, as inflation and unemployment rose concurrently in the mid-1970s, the Phillips Curve tradeoff proved unstable in the long run. While unemployment was on the decline towards the end of the decade, inflation remained high, hitting 11% in June 1979. (Federal Reserve Bank of St. Louis).
Because of his anti-inflation ideas, Paul Volcker was chosen chairman of the Federal Reserve in August 1979. He had previously served as president of the New York Fed, where he had expressed his displeasure with Fed actions that he believed contributed to rising inflation expectations. In terms of future economic stability, he believes that rising inflation should be the Fed’s top concern: “It is what is going to give us the most troubles and cause the biggest recession” (FOMC transcript 1979, 16). He also thought the Fed had a credibility problem when it comes to controlling inflation. The Fed had proved in the preceding decade that it did not place a high priority on maintaining low inflation, and the public’s belief that this conduct would continue would make it increasingly difficult for the Fed to drive inflation down. “Failure to continue the fight against inflation now would simply make any subsequent effort more difficult,” he said (Volcker 1981b).
Instead of focusing on interest rates, Volcker altered the Fed’s policy to aggressively target the money supply. He chose this strategy for two reasons. To begin with, rising inflation made it difficult to determine which interest rate targets were suitable. Due to the expectation of inflation, the nominal interest rates the Fed targeted could be relatively high, but the real interest rates (that is, the effective interest rates after adjusting for inflation) could still be quite low. Second, the new policy was intended to show the public that the Federal Reserve was serious about keeping inflation low. The anticipation of low inflation was significant, as present inflation is influenced in part by future inflation forecasts.
Volcker’s initial efforts to reduce inflation and inflationary expectations were ineffective. The Carter administration’s credit-control scheme, which began in March 1980, triggered a severe recession (Schreft 1990). As unemployment rose, the Fed relented, reverting to the “stop-go” practices that the public had grown accustomed to. The Fed tightened the money supply further in late 1980 and early 1981, causing the federal funds rate to approach 20%. Long-term interest rates, despite this, have continued to grow. The ten-year Treasury bond rate surged from around 11% in October 1980 to more than 15% a year later, probably due to market expectations that the Fed would soften its restrictive monetary policy if unemployment soared (Goodfriend and King 2005). Volcker, on the other hand, was insistent that the Fed not back down this time: “We have set our course to control money and credit growth.” We intend to stay the course” (Volcker 1981a).
High interest rates put pressure on sectors of the economy that rely on borrowing, such as manufacturing and construction, and the economy officially entered a recession in the third quarter of 1981. Unemployment increased from 7.4% at the beginning of the recession to nearly 10% a year later. Volcker faced repeated calls from Congress to loosen monetary policy as the recession worsened, but he insisted that failing to lower long-run inflation expectations now would result in “more catastrophic economic situations over a much longer period of time” (Monetary Policy Report 1982, 67).
This perseverance paid off in the end. Inflation had dropped to 5% by October 1982, and long-term interest rates had begun to fall. The Fed permitted the federal funds rate to drop to 9%, and unemployment fell fast from over 11% at the end of 1982 to 8% a year later (Federal Reserve Bank of St. Louis; Goodfriend and King 2005). Inflation was still a threat, and the Fed would have to deal with several “inflation scares” during the 1980s. However, Volcker’s and his successors’ dedication to actively pursue price stability helped ensure that the 1970s’ double-digit inflation did not reappear.