by Michael Maharrey  0   0

On July 1, the Federal Reserve Bank of Atlanta lowered its Q2 GDP projection to -2.1%, officially forecasting a recession.

So, much for Jerome Powell’s “soft landing.”

A recession is technically defined as back-to-back quarters of negative GDP growth. If the Atlanta Fed’s projection of negative growth in Q2 comes to pass, it will couple with the first-quarter decline of -1.6% to put the US economy solidly in recession territory.

The Atlanta Fed lowered its projection after analyzing the Manufacturing ISM Report On Business from the Institute for Supply Management and the construction report from the US Census Bureau, which came in relatively flat. According to the bank, “The nowcasts of second-quarter real personal consumption expenditures growth and real gross private domestic investment growth decreased from 1.7% and -13.2%, respectively, to 0.8% and -15.2%, respectively.

The Atlanta Fed has slowly ratcheted down its Q2 projection throughout the quarter. Back in May, the bank was estimating growth above 2%.

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This undercuts the “strong economy” narrative we’ve heard from Federal Reserve Chairman Jerome Powell, President Biden, and Treasury Secretary Janet Yellen.

It also creates a dilemma for the Fed as it fights inflation with tighter monetary policy.

Just last week, Powell was talking up the economy during congressional testimony.

But if you look at the strength of the economy, households are in very strong financial shape, they’ve still got a lot of excess savings – from forced saving of not being able to travel and things like that – and fiscal transfers. The same thing is true with business, with very low rates of default and lots of cash on the balance sheet. The labor market is also tremendously strong, still averaging very high job growth per month. Overall, the US economy is in the position to withstand tighter monetary policy, we think.”

It will become much more difficult for Powell to spin this yarn if the economy is in an official recession.

It will also prove the Fed chair and the Biden administration were wildly wrong once again. A negative Q2 GDP will confirm we’ve been in a recession since the beginning of the year — the entire time that they have been talking up a booming economy. It’s like transitory inflation all over again.

It is also eerily reminiscent of 2008 when the Great Recession was already underway while the central bankers at the Fed, government economists, and mainstream pundits kept insisting the economy was strong and there was no recession in sight.

So, what will this mean for the Fed’s inflation fight?

As I wrote after the last FOMC meeting, a recession is inevitable with monetary tightening, but I don’t think Powell and Company have the fortitude to keep tightening into a recession — despite lingering inflation.

This economy was built on easy money and debt. Taking away the easy money will pop the bubble and collapse the house of cards economy. In reality, this needs to happen. We need a recession to cleanse all of the misallocations and distortions out of the economy. But that would mean a lot of pain. And for all of the tough talk, I don’t think the Fed has the political will to allow the economy to crash.”

Employment is the one metric that still looks strong. But labor data tends to be a lagging indicator. Companies don’t predict a recession and start laying people off. They react to a recession once it starts. Over the last several weeks, we’ve seen a softening in job numbers. The four-week average of weekly unemployment claims was at the highest level since December last week. And while the May Labor Department report come in with a strong headline number, hiring slowed in five out of eight sectors.

Still, you might wonder how the economy could tip into a recession when jobs were plentiful and supposedly everybody was working. Beyond the fact that the official numbers likely overstate the strength of the labor market, inflation has effectively meant a pay cut for everyone. Wages have increased, but they haven’t kept pace with rising prices. As a result, consumers have had to cut back on discretionary spending. We saw this in the most recent retail sales numbers.

Consider this: if we’re already in a recession with low unemployment, imagine how bad it will get as unemployment rises.

This could turn out to be a worse recession than the Great Recession. And if the Fed chickens out on the inflation fight, we’ll have the worst of both worlds – economic recession coupled with rising prices — stagflation.

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