From Recession Probability to FOMC Meeting, Critical Week for US Economy

From Recession Probability to FOMC Meeting, Critical Week for US Economy
Traders work on the floor of the New York Stock Exchange (NYSE) on April 25, 2022 in New York City. (Spencer Platt/Getty Images)
Andrew Moran

Financial markets will digest a wide range of data this week, including the much-anticipated report on second-quarter gross domestic product (GDP). Investors also will closely monitor the results of the Federal Reserve’s July policy meeting.

Regional Fed surveys, housing numbers, consumer indexes, and labor and inflation figures also will be released throughout the week.

For investors, GDP data and the Fed meeting will be the main focus during what experts say is the most important week of the summer.

Will the US Avert a Recession?

The Bureau of Economic Analysis (BEA) will release the second-quarter GDP numbers on July 28. The market consensus for the GDP growth rate has risen, to an annualized pace of 0.5 percent.
However, the Fed Bank of Atlanta’s GDPNow model estimate suggests a negative 1.6 percent reading in the April-to-June period. This model emulates the methods utilized by the BEA to estimate the growth rate.
Shopping in Rosemead, Calif., on April 21, 2022. (Frederic J. Brown/AFP via Getty Images)
Shopping in Rosemead, Calif., on April 21, 2022. (Frederic J. Brown/AFP via Getty Images)

Bank of America’s baseline forecast is a recession, citing new price pressures in 2022 and 2023.

“A big part of the problem is that even temporary (but sustained) price increases can leave a legacy of higher inflation expectations,” Ethan Harris, head of global economics at Bank of America Global Research, stated in his weekly commentary. “Hence, increasingly, central banks need to do part of the dirty work of bringing inflation back down.”

In the first quarter, the U.S. economy contracted 1.6 percent. If the second quarter also shows a negative reading, the country would be in an economic downturn, based on the standard definition of recession.

Ahead of the GDP report, the White House has attempted to downplay a potential recession.

Council of Economic Advisers Chair Cecilia Rouse and member Jared Bernstein wrote in a blog post that even if the data were to show two consecutive quarters of negative growth, it doesn’t mean the United States is in a recession.

“Recession probabilities are never zero, but trends in the data through the first half of this year used to determine a recession are not indicating a downturn,” the White House wrote.

Speaking in an interview with NBC’s “Meet the Press” on July 24, Treasury Secretary Janet Yellen conceded that economic growth is slowing, but said a recession isn’t inevitable. She alluded to strong jobs numbers and robust consumer spending.
“This is not an economy that is in recession,” she said. “But we’re in a period of transition in which growth is slowing, and that’s necessary and appropriate.”

Will the Fed Be Hawkish or Ultra-Hawkish?

The Federal Open Market Committee (FOMC), the policy-setting arm of the Fed, will finish its two-day meeting on July 27. The meeting will be a key focus for the financial markets this week, says Giuseppe Sette, president of Toggle AI, an artificial intelligence-driven investment research firm.

Following the sizzling 9.1 percent inflation reading in June, the market had raised its bets that the central bank would pull the trigger on a full-point rate increase. However, the chances of a 100 basis-point increase in the benchmark fed funds rate, which would be the highest since the 1980s, have dwindled over the past week.

“For now, odds heavily favor a 75-basis-point hike, and markets will be eager for further clues during [Fed Chair Jerome] Powell’s post-meeting news conference,” Sette wrote in a note on July 25. “A Fed surprise—more hawkish in the face of economic data—or weakened earnings from tech bellwethers could be a trigger to retest market lows.”

According to the CME FedWatch Tool, the probability of a full-point move stands at 25 percent, down from as much as 42 percent earlier this month.

But if the United States is in a recession, it will be a challenge for Powell to reaffirm the central bank’s commitment to lowering the target inflation rate to 2 percent, while facing a slowing economy, FXStreet senior analyst Joseph Trevisani says.

“Even if the Fed continues its anti-inflation increases, an economic slowdown will force rates down next year, or sooner. The regional Fed manufacturing surveys are almost all pointing lower, toward contraction,” he told The Epoch Times. “In the unlikely chance that the second quarter registers positive growth, inflation, labor shortages, and manufacturing issues are largely unabated and eating away at economic growth.”

‘November Can’t Get Here Fast Enough’

Some economic data were released on July 25 ahead of this week’s much-anticipated figures.
The Dallas Fed Manufacturing Index, a general business activity measurement for the sector in Texas, weakened, to minus-22.6, in July, from minus-17.7 in June. This is the third consecutive month that the index has been in negative territory.

New orders dwindled, to negative 9.7, while the capacity utilization index was unchanged, at 3.5. Prices and wages rose at a modest pace. Employment and shipments picked up this month. Business expectations for manufacturing activity were mixed.

Survey participants highlighted an industry that’s experiencing a notable slowdown in activity, particularly in the building and construction market. Business leaders noted that they haven’t seen inflation come down yet, and other respondents added that they “cannot find the qualified people to expand our output.”

The lack of certainty in the supply chain has weighed on businesses, according to one individual involved in machinery manufacturing.

“We solve one issue, only to see another supplier give us bad news with delays/pushouts,” the survey respondent said.

But President Joe Biden’s paucity of support for the domestic energy sector also is adding a great deal of uncertainty for oil and gas firms.

“President Biden going overseas to beg for more oil supply instead of working with the domestic producers really adds uncertainty to the domestic producers and their budgets. This will affect our plans dramatically for expanding our business,” another respondent stated.

“November can’t get here fast enough,” still another respondent said.

Manufacturing grew but headwinds remain, according to the latest PMIs (Rui Vieira/PA)
Manufacturing grew but headwinds remain, according to the latest PMIs (Rui Vieira/PA)
Meanwhile, the Chicago Fed National Activity Index, a monthly gauge of overall economic activity and related inflationary pressures, was stuck in June, at negative 0.19, for the second consecutive month. The report highlighted declines in production and employment, with tepid gains in sales, orders, and inventories.
In addition, the index’s three-month moving average tumbled to negative 0.04 last month, the first negative reading in about two years.

Other Data to Monitor

This week, investors will also comb through other crucial information, including:
  • The S&P/Case-Shiller Home Price Index, the Census Bureau’s new home sales, and pending home sales will be released.
  • The Richmond Fed Bank and the Kansas Fed Bank will publish their manufacturing indexes.
  • The Conference Board’s July Consumer Confidence Index is projected to ease again. The University of Michigan’s final Consumer Sentiment Index reading will come out on July 29.
  • Durable goods orders are anticipated to have slid 0.4 percent in June.
  • For June, personal income and spending are anticipated to grow 0.5 percent and 0.9 percent, respectively.
  • The Personal Consumption Expenditure (PCE) price index, which is the Fed’s preferred inflationary gauge, will be released for June. Plus, the Bureau of Labor Statistics’ employee costs data, including benefits and wages, will be published for the previous quarter.
Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
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