As we prepare to start the fourth quarter of 2022, it is my pleasure to report that the U.S. economy is not in a recession — at least not yet.
The official data for the third quarter will stream out in a few weeks; however, I have seen enough already to be confident the U.S. economy is not yet contracting. Undoubtedly, the pace of economic growth this past summer remained well below the long-term trend, but we currently live in an environment where slower economic growth is actually a good thing.
That's because slower economic growth is necessary to bring down prices, and so far this dynamic is unfolding favorably. The rate of inflation in the U.S. is decelerating and should continue to abate. I believe this to be true because commodity prices are sharply lower in recent weeks, and the value of the U.S. dollar is higher. This means that prices paid for goods in the U.S. should continue to move downward. The downside to this is that we are now exporting inflation to our trading partners, and this may in turn have negative future consequences. But for now, the rate of inflation in the U.S. is slowing.
A significant exception to this downtrend in overall consumer prices is the ongoing uptrend in prices paid in the services sector, particularly the price for rent. Unfortunately, this rent situation will take some time to correct, but we can take solace in the fact that many other price trends are showing improvement.
Another positive factor I can share is that the labor market is gradually moving toward a healthier equilibrium. Last month, the labor force participation rate ticked higher while the number of job openings ticked lower, and the headline jobs number registered a moderate pace of growth. When you combine all of these factors, it indicates that the gap between the number of open jobs and the number of workers is closing, and a smaller gap will reduce the upward pressure on wages. This will in turn put downward pressure on inflation.
The inflation hawks at the Fed will see that we are off to a good start, but it is still way too early to declare "mission accomplished." The decisions of the Fed notwithstanding, the macroeconomic environment as described by these three components — GDP growth, the inflation rate and the labor market equilibrium — will determine whether the U.S. economy enters an official recession.
And if we do enter an official, broad-based recession, will it be short and shallow or something more severe? At the present time, the probabilities of a soft landing are still fairly good, but like I say, it is still very early.
Therefore, let us not get too carried away just because the current trends are mostly favorable, and please do not think I am trying to oversell the happy talk. There are still a number of formidable hurdles in our path to a robust state of economic health. These hurdles include adapting to significantly higher interest rates; a pending energy crisis in Europe, which will have global implications; heightened geopolitical tensions; and a challenging global supply chain situation.