US Recession Debate Irrelevant Amid Threat of Long-Term Stagflation, Experts Believe
13:52 GMT 30.07.2022 (Updated: 13:55 GMT 06.08.2022)
© AP Photo / Mary Altaffer
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WASHINGTON (Sputnik) - The debate over the definition of a recession sparked by the White House this week is of secondary importance because the US economy, beset by stagnation and soaring prices, may be on the verge of something much worse, some analysts think.
The US Commerce Department's data released on Thursday confirmed that the US economy shrank for two consecutive quarters, the popular definition of a recession. Gross Domestic Product (GDP) fell by 0.9% in the second quarter after falling 1.6 percent in the first, according to the US Bureau of Economic Analysis.
However, President Joe Biden later denied that the country was facing such an economic downturn, despite the GDP data, only to be contradicted by New York City Mayor Eric Adams, a fellow Democrat, who said the country was not only in a recession, but Wall Street was on the brink of collapse.
The GDP data came a day after the Federal Reserve raised interest rates for the fourth time this year in a bid to rein in inflation that is running at a 41-year high of 9.1 percent.
Fed Chairman Jerome Powell downplayed talk of recession, pointing to the strong labor market, while the White House disputed the notion that the textbook definition of a recession is two consecutive quarters of negative growth.
Beyond Recession
The US National Bureau of Economic Research (NBER) actually defines a recession as more than a few months of significant economic decline. The Biden administration has argued that in determining a recession economists look at variables such as labor market conditions, consumer and business spending, industrial production, and incomes - in addition to GDP.
"The question of whether a recession is coming this year or next is much less important than the likelihood that the US economy has entered a long period of stagflation - which would be a big step backward from even the historically slow recovery that followed the global financial crisis and Great Recession," International trade analyst Alan Tonelson said.
During the 2008 recession, Tonelson recalled, prices were tame and stable but growth was slow. Living standards, he added, bounced back only weakly largely because productivity growth - the best way to achieve robust and sustainable prosperity - was so meager.
"Now productivity improvement remains feeble, both the Fed and the Congressional Budget Office peg the economy's medium term growth rate at under 2% and inflation will surely stay elevated well into 2023, and would subside meaningfully only if demand levels remain subdued and therefore overall growth remained subpar," he said.
Several years ago, former Secretary of the Treasury Larry Summers revived the term "secular stagnation" to describe a US economy that he believed could only foster acceptable growth by inflating asset bubbles that were bound to burst disastrously, Tonelson noted.
"Today, we may be in for prolonged secular stagflation," Tonelson concluded.
Even if the textbook definition goes beyond GDP growth, other indicators are not looking good either. Levy Economics Institute of Bard College Research Associate Marshall Auerback said the latest economic data confirmed the reality of recession.
"Since June 15, we have had an across-the-board deterioration in almost all economic indicators," Auerback said. "We now have a 3-month average household survey job change that is significantly negative. Whenever that has happened in the past we were already in recession."
Other indicators have plunged as well, he added, including home sales, construction spending, and industrial production.
Moreover, US investors were moving away from stocks into bonds, always a sure sign that an economic downturn was expected and imminent, Auerback pointed out.
Political analyst and former hedge fund manager Charles Ortel cautioned that a stagflation cycle would be long, deep-rooted and particularly difficult to break.
"Is it inflation or recession? It is both. Costs are relentlessly increasing now that inflation has become an accepted reality. So most individuals and families are struggling to survive. Meanwhile, those lucky enough to have money to invest are concerned that interest rates will continue to rise and thereby depress values of many asset classes," Ortel warned.
Ortel predicted that the recession would accelerate and reach serious dimensions in the fall.
"With the cost of human labor rising and the ease of replacing humans with technological substitutes increasing, expect the real pain to come with layoffs accelerating come September and afterwards," he said.
Mitigation Needed
Brown University retired Assistant Professor of Economics Barry Friedman agreed that the US economy faced a stagflationary future but he advised that determined federal policy could still mitigate its effects and get the inflation aspect under control.
"In a market you can put downward pressure on prices either by policies to restrict demand or increase supply. The part of inflation due to excess demand can be brought down with restrictive budget and monetary policies," he pointed out.
However, it will take time for producers and consumers to make the decisions on cutting costs and cutting outlays that together will restrain the increase of prices, Friedman acknowledged.
"The Fed says it is willing to tolerate a slowdown in growth in order to bring inflation down to a target rate. I think they are quite determined. Pain means ultimately incomes, liquid assets, and employment opportunities for the bulk of the population are reduced, so price pressures are reduced. And there will always be some pain," he said.
There was a consensus of American economists that inflation will not be cooled until consumer demand and employment come under pressure and drawdowns of their liquid assets, Friedman commented.
"It will be some pain. But with resolve, the period of 'stagflation' can be shorter than in some earlier cycles with vacillating resolve such as in the late 1960s, [with] President [Lyndon] Johnson's unwillingness to raise taxes to offset heavy spending for the 'wars on poverty' and Vietnam," he said.
Ortel, however, is not confident the Biden administration will create any conditions conducive to reviving long-term capital investments in the domestic economy and feared the continual wasting of money on nonproductive initiatives.
"This is a time to cut personal spending, reduce debt and save," Ortel said. "Not to borrow money that we do not have to spend epic sums on social justice fantasy programs."
