Forex Analysis & Reviews: 29.07.2022 - US economy enters recession

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29.07.2022 07:11 AM

US economy enters recession

The previous article concluded that the US stock market would resume its fall. This assumption is based on high probability of recession and further aggressive increase of interest rate by the Fed. It is important to focus traders' attention on the Q2 GDP report, which was released yesterday. According to this report, the US economic growth declined by 0.9% while economists predicted a growth of 0.5-0.6% after a dismal first quarter. Thus, the US economy has been declining for two consecutive quarters. Notably, the last time this situation occurred in 2020, when the coronavirus pandemic began. At that time, the US GDP fell dramatically, followed by exponential growth. Currently, GDP is dropping first by 1.6%, then by 0.9%. We think the US recession has already begun. Earlier, it was mentioned that it was unreasonable to draw optimistic conclusions taking into account only the May drop in inflation. Then the consumer price index (CPI) fell by one-tenth of a percentage point. However, many economists said that the US economy hit its peak. The situation is identical with the GDP. The figure for one quarter is insignificant. However, two consecutive quarters which closed negative are of key importance.

Notably, Jerome Powell denied that a recession had started in the US. The major reason for it is a strong labor market and low unemployment. However, these factors could not prevent the US economy from declining. Powell probably tried to calm market players. However, he failed to do it. As mentioned above, the Fed's forecasts often are not realistic. For example, Powell has claimed for six months that the spike in US inflation is temporary. Currently, the CPI has already risen to 9.1%, ignoring the rate hike to 1.75% at that time. The Fed considers a recession to have begun if the annual value of GDP is negative. However, the annual value is made up of quarterly values. Moreover, there are two negative figures. Overall, we believe that the US economy is facing a recession. The only question is how severe and prolonged it will be. The key point is when inflation starts to slow, and what measures the Fed is willing to take to get it back to the 2% level. If inflation does not decline even after the 2.5% rate hike, the rate should be raised to at least 4%. However, the higher the key rate surges, the stronger the economic slowdown is. Therefore, the recession could be prolonged.

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