The US economy grew much faster than expected in the June quarter: at an annualised rate of 2.8%, compared to market expectations of 2% annual growth, according to the first set of data for the quarter from the US Commerce Department, released last week. Better still, price indices fell sharply from the first quarter.
“Is the US economy growing too quickly?” tweeted New York Times Pitchbot, an account that lampoons The New York Times’ incessant efforts to always find something bad to say about the Biden administration in its quest for balance at all costs.
Firmer data on the quarter will emerge in coming months, but the result confirms that, despite a long succession of interest rate hikes by the US Federal Reserve, the Biden administration has kept growth ticking over nicely. Fears of a recession are “dying on the vine”, one commentator noted, with unemployment still at 4.1% and real wages continuing to grow.
Even so, some continue to search for bad news for the US economy, using a variety of indicators. For a long time, it’s been the inverted yield curve — the negative difference between the two-year and 10-year US government bond rates, which has traditionally been seen as a harbinger of recession. After a couple of years, the difference between the two rates has shrunk noticeably, and there’s been no recession.
Then there are temporary jobs — a fall in that indicator is also said to be a sign recession is on the way. The Bureau of Labor Statistics (BLS) has said that a fall in temporary job numbers has preceded a decline in the wider labour market by six to 12 months for previous recessions like 1991, 2001 and 2008 (which to be fair was due to the global financial crisis and its massive dislocation). Some media outlets are still saying it.
But temporary jobs have been falling for a long time now — the BLS says temporary employment peaked in March 2022; the US jobs market has shed 515,000 temporary jobs since then for a 16% drop. And yes, job vacancies have fallen and jobless numbers overall have risen in the past year, with the unemployment rate now at 4.1%.
Except, it’s not so long since 4.1% would have been regarded as full employment and impossible to obtain without high inflation. The non-accelerating inflation rate of unemployment (NAIRU), along with the Phillips Curve, has had a rough few years as a once reliable economic indicator — along with the cry-wolf warning of “wage-price spirals”.
In Australia the media defines a recession as when we have two consecutive quarters of negative growth. But the US looks at it differently, taking into account employment, personal income and consumer spending as well. The US had three consecutive quarters of negative growth in 2020 during the pandemic, but the actual recession was only two months, with the low point in April of that year, because the flood of support money enabled employment and spending to remain solid.
The latest indicator being held up as evidence that recession really, definitely, is coming this time is what’s called the Sahm Rule, named for former US Fed economist Claudia Sahm: the economy is likely to be in a recession when there is a 0.5 percentage point increase in the three-month average unemployment rate over the prior 12 months. As of June, that difference was 0.43 of a percentage point. That’s “flashing yellow” about a recession, according to pundits.
A big problem with the Sahm Rule, though, is that unemployment can go up not merely due to a fall in job vacancies but also because the market is so buoyant that people out of the workforce are encouraged to enter it, lifting participation. Participation in the US has been rising steadily since the pandemic and is now nearly back to the levels of 2015.
A president with unemployment at 4.1%, inflation at 3%, GDP growth at 2.8%, rising workforce participation and rising real wages growth could, in normal times, look forward to reelection. But politically those indicators are all now every bit as useless as the inverted yield curve or temporary jobs.
