Oh Tae-dong, Head of Research Division, NH Investment & Securities
The U.S. Department of Commerce announced that the U.S. gross domestic product (GDP) fell 0.9% on an annualized basis from the previous quarter, according to preliminary figures. Although this figure is a breaking figure and may be revised twice later, it is highly likely that the second consecutive quarter of negative growth following the -1.6% growth in the first quarter.
Although the recession has not been formalized due to the slightly different criteria for recession judged by the National Economic Research Institute, the US economy can be judged to be in a recession in the first half of this year.
Even though the US economy is growing negatively, the number of Americans employed is increasing. It may sound strange, but it is a ‘recession accompanied by employment recovery’.
In general, when the economy recovers, investment, production, and employment increase. On the other hand, when the economy slows or stagnates, investment, production, and employment decrease.
Over the past few decades, the U.S. economy has taken a different view from what is commonly thought of the economy. From the 1990s to the 2010s, the economy continued to grow without employment for nearly 30 years. Income inequality becomes a social problem if job recovery is sluggish even with an increase in gross domestic product (GDP). To solve this problem, the US government has lowered the housing purchase requirements and maintained a low interest rate policy (monetary expansion) based on stable inflation. This monetary expansion policy often led to a bubble in the real estate market.
On the other hand, in the 1960s and 1970s, even after the economy entered a period of official recession, the number of employed people increased for 15 months, and the wage growth rate remained above 5%. The US economy in the first half of this year looks similar to that of the 1960s and 1970s.
Fed Chairman Jerome Powell insists that the US job market is healthy and not a recession. In the 1960s and 1970s, when the ‘recession with employment recovery’ occurred, the US Fed raised interest rates during the recession, but nevertheless did not fully control inflation.
Inflation could only subside in the early 1980s, when interest rates continued to rise even after the US Consumer Price Index (CPI) growth rate had completely stopped, and Saudi Arabia’s oil policy shifted to increased production.
Although the US appears to be entering a recession in terms of gross domestic product (GDP), the job market remains strong. Inflation is still soaring through a variety of routes and is unlikely to break easily for some time to come. On the other hand, as the US economy is slowing, expectations are working that the US policy to raise interest rates will retreat. Already, the US bond futures market is predicting that the US Federal Reserve will cut interest rates in 2023.
But the US Fed will not significantly slow down its tightening until inflation is caught. It is necessary to keep in mind that the necessary precondition for the US Federal Reserve’s interest rate hike to soften is a sign that inflation is waning. As a result of the United States’ policy of raising interest rates despite the economic downturn in the 1960s and 1970s to catch inflation, Latin American countries such as Mexico and Brazil experienced financial crises.
I don’t think this time will be any different. As the US Federal Reserve continues to raise interest rates, it is likely that countries with high government debt or weak ability to earn foreign currency will fall into a crisis. Financial markets will go through a real bottom with such a crisis.
Oh Tae-dong, Head of Research Division, NH Investment & Securities
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