Two Area Economists Say It’s Too Early To Call a Recession

(KNSI) – The United States economy shrank at a 0.9% annualized rate in the second quarter, according to a preliminary estimate. The number marks two consecutive negative prints, considered by many to be a sign of recession.

Two local economists say they aren’t ready to deem the current slowdown a recession yet. College of St. Benedict Economics Professor Louis Johnston explains his reasoning.

“Economists are a little more subtle about our definitions of recessions. We definitely need to see some decline in GDP or at least a significant slowdown in it. But we also look at indicators like employment. And when you look at the job market, there’s nothing showing in the job market. We’re in a really anomalous time.”

Minnesota’s unemployment rate is at an all-time low of 1.8%. Firings are typically considered a lagging economic indicator, but companies insist they don’t plan to lay many off right now. Several have announced an intention to reduce hiring plans due to the slowdown, though.

Saint Cloud State University School of Public Affairs Dean King Banaian says Thursday morning’s second quarter GDP number isn’t surprising.

“I don’t think this data told us anything we didn’t already know. The rise in interest rates from the Fed is having a dampening effect, particularly in the housing sector. As a result of that, yeah, GDP just is not growing as fast as it did before.”

Banaian says partisans want to make a recession call immediately, either to deflect or to score a political win. He points out the American economy is huge and it is hard to get an accurate read on it and analyze the data in under 30 days. Revisions and new figures in the coming months will make things clearer, according to Banaian.

Both Johnston and Banaian are looking for more rate hikes. Johnston says the data so far is most likely not enough to get the Federal Reserve Bank to alter its monetary tightening policy.

“I would not see them reversing course on this. I think they need to, or at least they think they need to prove that they are determined to stomp out inflation, and I’m concerned that they’re willing to go too far to do it just to prove a point.”

Johnston says if there isn’t a significant slowdown in the inflation rate over the next two months, he expects another 75 basis point (0.75%) hike in September.

Banaian says the steps the Federal Reserve have taken should help bring down price increases, but it is a process. Consumers are increasingly turning to credit cards to continue to buy services while weathering the high cost of necessities like food, rent, and gasoline. Banaian says inflation will recede when that cycle ends. There are some signs it is already happening.

“Probably for the bottom 20 to 30% of the income distribution it has come to an end already. The question is what happens as you move up the scale? People have been able to pay down their credit cards and now they’re using them again, and the question is when do you hit those limits?”

The Fed says it will be data-dependent in the coming months to determine monetary policy. Banaian says to look at Chairman Jerome Powell’s Jackson Hole speech in late August for clues.

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