U.S. Economy Shows Clear Signs of Recession

How is the U.S. economy really doing? Is it booming or in decline?

Before discussing this issue, it is important to state a viewpoint: "recession" and "collapse" are different, and they have an essential distinction.

Just like a student who originally scored 90 points, "recession" refers to scoring 80 or 75 points, while "collapse" refers to failing the exam.

The United States is far from discussing when its economic level will collapse, so please do not think in black and white. The discussion of U.S. economic recession in this article is different from the easily resonant but factually incorrect U.S. collapse theory found online. Now, let's move on to the main topic.

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The U.S. Department of Commerce's Bureau of Economic Analysis recently updated the GDP growth data for the third quarter of the United States, which increased by 0.3 percentage points compared to the previously announced preliminary value, reaching an annualized growth rate of 5.2%.

This growth rate is undoubtedly excellent. After excluding the abnormal quarterly GDP growth data caused by the COVID-19 pandemic in 2021, we find that this year's third quarter is the fastest quarter of U.S. GDP growth in recent years.

Even according to the familiar year-on-year method, the GDP growth rate of the United States in the third quarter also reached 3%, leading among developed countries.

Of course, you may think that the U.S. data is fabricated, which is not within the scope of this article's discussion. Those who believe the data is fake cannot provide evidence or the real data they recognize.

Many people are puzzled by the extremely high economic growth rate of the United States.

It was said that interest rate hikes would suppress the economy. Many EU countries have fallen into growth stagnation due to interest rate hikes by the European Central Bank, and the situation in the UK is also not good. The United States has raised interest rates the most, so why can it stand alone, and what is special about the United States?The United States indeed has its unique aspects, with the key lying in the US dollar.

As the global currency for trade, investment, and financing, the US dollar possesses a unique suction capacity that other currencies lack. The US leverages this to transfer the costs of interest rate hikes. Global hot money flows back to the US due to interest rate hikes, offsetting some of the negative impacts that tight monetary policy has on the US economy and employment. This leads to a more pronounced lag in the US economy's response to interest rate hikes.

The lag is merely a delay, not a non-occurrence. Over time, it is inevitable that the US economy will face a recession, and there are already some signs of this.

On the evening of December 6th (Beijing time), the US announced the ADP new employment figures. The November ADP was 103,000, lower than the market expectation of 130,000 and also lower than the revised October ADP employment figure of 106,000. More importantly, the US ADP has fallen short of market expectations for four consecutive months.

US financial institutions are very powerful, and their predicted data are relatively accurate. The consecutive misses in ADP indicate that the market is still too optimistic about the US employment situation, even though the predicted values are declining each month.

ADP is known as the "little non-farm," making its appearance before the more significant non-farm employment figures are announced. This data plays a crucial role in predicting the non-farm figures. In this light, it seems that the US non-farm employment for November is likely to underperform again.

Why do I use the word "again"? Because the US non-farm data for October was not very strong.

Last month, data released by the US Bureau of Labor Statistics showed that the US added 150,000 non-farm jobs in October, 30,000 less than the expected 180,000, marking the smallest increase since June of this year. The September non-farm figure was revised down to 297,000. In other words, the US non-farm employment for October was both below expectations and the previous figure.

On another note, the unemployment rate in October increased slightly, from 3.8% to 3.9%. Although it's just a 0.1 percentage point increase, looking back a few months reveals that the US unemployment rate is on an upward trend.

In April 2023, the US unemployment rate was 3.4%, and it has fluctuated up and down in the following months, reaching 3.9% in October. According to this trend, the upcoming November unemployment rate is very likely to exceed 4%, setting a new high since February 2022.Whether it's ADP or non-farm employment data, both employment numbers and unemployment rates indicate that the U.S. job market is slowing down. There are two indicators to judge the development trend of a country's economy: one is GDP, and the other is employment data. The former is announced once every quarter, while the latter is updated monthly, so changes in employment data can better reflect short-term trends.

It is almost certain that the U.S. GDP in the fourth quarter will not be able to maintain high-speed growth like the third quarter, and it will further slow down or even fall into a recession next year. According to historical experience, U.S. economic recessions often occur between 18 months and 24 months after the first interest rate hike. The starting point of this round of interest rate hikes was March 2022, and 18 months to 24 months later is between November 2023 and May 2024. The current data highly matches historical experience.

It is not surprising that the U.S. economy shows signs of recession. As the central bank of the United States, the Federal Reserve's violent interest rate hikes in this round require someone to pay the bill, it's just a matter of time.

The Federal Reserve is responsible for formulating U.S. monetary policy. In order to curb inflation that once exceeded 9%, it took drastic measures. In less than a year and a half, it raised the U.S. federal funds rate from 0.25% to 5.5%, with an interest rate hike of 525 basis points. The speed and magnitude of the increase are unprecedented.

There has been no obvious economic recession so far because the excess savings formed during the QE period have not been exhausted. As time goes on, the excess savings are getting less and less, and signs of recession have emerged, which is a warning to the Federal Reserve.

If Powell doesn't want President Biden to lose the election next year, he must stop "misconduct" and change the existing tight policy as soon as possible to avoid a "hard landing" of the U.S. economy.

Some people say that in the U.S. political system, the U.S. government cannot interfere with the decisions of the Federal Reserve.

In theory, this is true, but in practice, it is different. What is more important is that the nomination power of the Federal Reserve chairman is in the hands of the president. Biden nominated Powell for re-election two years ago. Should Powell, who has enjoyed this "favor," repay the favor and make some efforts for Biden's re-election next year?Economic development is one of the main factors that American people consider whether President Biden is qualified during his term. At the critical moment when the U.S. economy is about to fall into the shadow of recession, changing from "pumping" to "releasing" can obviously delay the time of recession. Will Powell return a favor? I think the possibility is very large.