Yellen plays down US recession as wave of economic data looms

Policy

FILE – Treasury Secretary Janet Yellen testifies before the House Ways and Means Committee during a hearing on the proposed fiscal year 2023 budget on Capitol Hill, Washington, June 8, 2022 (AP Photo/Jose Luis Magana, File)
Associated Press

Treasury Secretary Janet Yellen said on Sunday that the US economy is slowing but cited healthy employment as evidence that it has not yet entered a recession.

Yellen spoke on NBC’s “Meet the Press” ahead of a slew of economic reports released this week that will highlight the economy currently besieged by rampant inflation and threatened by higher interest rates. The data will cover new home sales, consumer confidence, incomes and spending, inflation and aggregate production.

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The most important report is likely to be on Thursday, when the Commerce Department will release its first estimate of the economy’s output for the April-June quarter. Some economists expect it may show contraction for the second consecutive quarter. The economy contracted 1.6% in the January-March quarter. Two straight negative readings are an unofficial definition of recession, although in this case economists think this is misleading.

Instead, the National Bureau of Economic Research—a nonprofit group of economists—defines a recession as “a significant decline in economic activity that spreads throughout the economy and lasts more than a few months.”

Yellen argued that much of the economy remains healthy: Consumer spending is growing, US finances are, on average, strong, and the economy has added more than 400,000 jobs per month this year, a solid number. The unemployment rate is 3.6%, close to its lowest level in half a century.

“We have a very strong job market,” Yellen said. “This is not an economy in a recession.”

However, Yellen acknowledged that the economy is “in transition in which growth is slowing” from a historically fast pace in 2021.

The slowdown is “necessary and appropriate,” she said, because “we need to grow at a steady and sustainable pace.”

The slowdown in growth could help bring down inflation, which is at 9.1% and is the highest in two generations.

However, many economists believe a recession is looming, as inflation erodes Americans’ ability to spend and the Federal Reserve rapidly raises borrowing costs. Last week, economists at Bank of America became the last to expect a “mild recession” later this year.

“There is a very high possibility of a recession,” as the Federal Reserve raises interest rates to combat inflation, Larry Summers, Secretary of Treasury under President Bill Clinton, said on CNN’s “GPS” program on Sunday. These higher borrowing costs are meant to reduce consumer spending on homes and cars and slow commercial borrowing, which could lead to deflation.

On Wednesday, the Fed is likely to announce its second consecutive 0.75% point increase in the short-term interest rate, a huge increase it hasn’t done since 1994. This would put the Fed rate in a range of 2.25% to 2.5% , the highest level since 2018. Federal policy makers are expected to continue rising until its rate reaches about 3.5%, the highest level since 2008.

The Fed’s hikes have torpedoed the housing market, with mortgage rates doubling in the past year to 5.5%. Existing home sales have declined for five consecutive months. On Tuesday, the government is expected to report a drop in new home sales in June.

Lower home sales also mean less spending on items that usually come with buying a new home, such as furniture, appliances, curtains, and kitchen utensils.

Many other countries are also grappling with high inflation, and slowing growth abroad could weaken the US economy. Europe faces the threat of recession, with inflation rising and the central bank raising interest rates last week for the first time in 11 years.

European Central Bank President Christine Lagarde also sought to reduce recession fears at a press conference last Thursday.

“Under the base scenario, there is no recession, neither this year nor next,” Lagarde said. “Is the horizon cloudy? Of course it is.”

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