The U.S. has technically been out of money since it hit the debt ceiling on Jan. 19. So what happens if lawmakers don’t agree on an increase by June? “A full-blown financial crisis cannot be ruled out,” writes Bloomberg, which simulated the effects that an unprecedented three-month stalemate would have on the economy. In that scenario, third-quarter GDP would plunge by 15%, more than two million people would lose their jobs, and education, Medicare and defense budgets, among others, would have to be slashed, the Bloomberg Economics model found.
Economic situation in the United States – September 2022
Fed could be ready to slow rate hikes
Minutes from the Federal Reserve’s November meeting signal that officials might be ready to pull back on aggressive interest-rate hikes. Following four consecutive increases of 0.75 percentage points, the central bank is more likely to approve a 0.50 rise in December, economists say. Underscoring those expectations are signs that the economy has cooled. Business activity is down for the fifth straight month, jobless claims have hit a three-month high and the housing market is slumping, suggesting that the Fed’s initial hikes are having an impact.
- Americans are losing confidence in the labor market, with unemployment expectations at their worst in over a decade, according to the University of Michigan.
The US economy slowed down in the 1st half of 2022 after a marked rebound since the 3rd quarter of 2020 which made it possible to erase the loss linked to the health crisis from the 2nd quarter of 2021. GDP growth then reached 5.7% in 2021, after -3.4% in 2020, driven by dynamic consumption and private investment. In 2022, GDP contracted by -0.4% in the 1st quarter and by -0.1% in the 2nd quarter due to the slowdown in demand. Despite this decline, in the 2nd quarter, US GDP was +2.6% above its pre-crisis level (4th quarter 2019).
The very large-scale budgetary and monetary support measures since the start of the Covid crisis have helped to promote a rapid recovery in activity, but at the cost of strong tensions in the economy – inflation and the labor market. Fiscal measures to support households and businesses amounted to nearly 25% of GDP, through (i) the strengthening of social protection mechanisms, (ii) guaranteed loans to small businesses, (iii) support financial assistance to sub-federal authorities, as well as (iv) support measures for households (direct monetary support, extension of unemployment insurance, etc.).
Moreover, the very accommodating monetary policy of the Federal Reserve (Fed) helped to ensure the stability of the financial system. In this context, inflation rose to 8.3% over twelve rolling months in August 2022 and its underlying component (excluding food and energy) to 6.3% driven by the acceleration in housing prices, non-petrol transport and health. On the labor market, the unemployment rate fell to its pre-crisis level of 3 ½% from the end of the first half of the year (continuously falling since its peak at 14.8% in April 2020) but this dynamism is hampered by the labor shortage with a participation rate below its pre-crisis level (62.4% in August, -1 point compared to February 2020), and two vacancies per unemployed person.
After massive support during the Covid period, public policies began to normalize in 2022, from a policy supporting demand to a policy more focused on supply with significant recourse to public funding. On the budgetary level, the Biden administration is advancing long-term investment spending, particularly in infrastructure, energy transition and the competitiveness of American industry) while reducing the deficit. Indeed, Congress voted bipartisanly for a $1,200 billion infrastructure investment plan over 10 years (Infrastructure Investment and Jobs Act, promulgated in November 2021), mainly in transport and equipment, as well as the law to strengthen the competitiveness of American industry (CHIPS and Science Act, promulgated on August 9, 2022), including in particular aid for the semiconductor industries ($52 billion) and investments in public R&D.
In addition, Congress adopted the Inflation Reduction Act (approximately $700 billion in revenue and $400 billion in expenditure) which aims to reduce household expenditure (health and energy), increase taxation of large companies (minimum tax at 15% and 1% of share buybacks) and strengthen energy security and ecological transition. Finally, the budget for the fiscal year 2023 focused on deficit reduction, security and investments for the future is under consideration in Congress. As for monetary policy, the Fed accelerated its normalization: after having put an end to asset purchases (quantitative easing) in March 2022, it raised the key rates (federal funds rate) by 25 basis points (bp) in March, by 50 bp in May and by 75 bp in June, July and September, bringing the target range to [3.0% ‒ 3.25%] and began to reduce its balance sheet with a monthly rate of 47, $5 billion from June to August, then $95 billion from September.
The economic trajectory in 2022, marked by persistent inflationary pressures, geopolitical tensions and evolving bottlenecks in supply chains, depends on the ability of monetary and fiscal authorities to ensure a smooth landing. The constraints weighing on supply, in particular the difficulties of supply and recruitment on the labor market, limit the recovery of activity and create an imbalance between supply and demand, which fuels the rise in prices, exacerbated by the war in Ukraine. Despite the Fed’s determination to contain inflation through monetary policy tightening during 2022, its ability to achieve this objective with a limited impact on economic activity is not guaranteed. Politically, the November 2022 midterm elections are part of a complicated economic context for the Biden administration, marked by inflation and in particularly the threat of soaring prices at the pump, and condition the ability of the Biden administration to pursue its economic program.
The Fed’s projections for September 2022 assume inflation of 5.4% at the end of 2022 and 2.8% at the end of 2023 (+0.2 points compared to the June projection for 2022 and 2023), and are revised sharply to the lower growth (revision of -1.5 points at the end of 2022 and -0.5 points at the end of 2023). Beyond the persistence of inflation, these projections are subject to numerous exogenous risks, including the persistent tensions in supply chains and the labor market, the war in Ukraine and the evolution of the pandemic.
Posted on September 22, 2022 – LinkedIn News
Economist puts recession risk at 80%
9/23/2022 – There is an 80% chance the U.S. will fall into a recession, according to Johns Hopkins University’s Steve Hanke, who blames the Federal Reserve for “exploding” the money supply. The central bank’s failure to manage inflation by carefully reducing the amount of money it poured into the economy during the pandemic has seen supply slow too suddenly, says Hanke, who predicts a recession in 2023. His comments come as a September CNBC survey of economists, fund managers and strategists put the chance of the U.S. slipping in recession over the next year at 52%.
- The Fed raised rates again this week, opting for a hike of 0.75 percentage points for the third straight month in a bid to tackle rampant inflation.