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Good News Is Bad News: Strong U.S. Jobs Gains Could Herald Economic Downturn

By Investing.com (Darrell Delamaide/Investing.com)Market OverviewAug 09, 2022 10:40
uk.investing.com/analysis/good-news-is-bad-news-strong-us-jobs-gains-could-herald-economic-downturn-200530550
Good News Is Bad News: Strong U.S. Jobs Gains Could Herald Economic Downturn
By Investing.com (Darrell Delamaide/Investing.com)   |  Aug 09, 2022 10:40
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  • U.S. added more than double the jobs forecast in July
  • Fed policymakers have had to affirm strong action to tame inflation
  • Bank of England is under attack as inflation rages

The U.S. is likely to slip into recession sometime in the next 12 months, if it is not there already. This was the conclusion drawn by Bill Dudley, the former president of the New York Federal Reserve Bank, in remarks last week ahead of the July jobs report.

That report showed a blistering gain of 528,000 jobs—more than double the 250,000 forecast—and a decline in the unemployment rate to 3.5% from 3.6% the previous month. This seemed to dispel the notion that the US economy is in the grip of a recession.

And yet the yield curve inversion in Treasuries widened in Friday trading. Yield on the 2-year notes shot up to 3.24% on Friday, while the 10-year note yield rose more slowly, hitting 2.84%. A yield-curve inversion famously signals a recession within the next two years.

It widened even further on Monday, as the two-year yield lost only 3 basis points, while the 10-year yield shed 7 bps.

So, Dudley was not wrong to look for a recession in the next 12 months. Investors returned to their good news is bad news stance, and immediately began anticipating further strong interest rate hikes from the Fed policymakers to beat back inflation and slow down employment gains.

Fed policymakers seemed to bolster this pessimism. They quickly weighed in with affirmations that the central bank would stay the course and keep raising rates strongly until inflation turned decisively downwards.

San Francisco Fed chief Mary Daly said Sunday on CBS’s Face the Nation that the Fed is “far from done”. She forecast a September rate hike of at least 50 bps. Daly does not have a vote on the Federal Open Market Committee this year, but she does take part in the debate.

Michelle Bowman, a member of the board of governors who gets to vote at every meeting of the FOMC, was more hawkish. Noting she had joined the consensus in July voting for a 75 basis-point hike, she said in a Saturday speech:

“My view is that similarly-sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way.”

That point, she made clear, has not yet been reached.

Some market bulls made much of the fact on Monday that a New York Fed survey showed consumers lowering inflation expectations in July. But the decline was not really that great. The July survey showed expectations of 6.2% over the next 12 months, compared to 6.8% in June, and 3.2% over the next three years, compared to 3.6% in the previous month.

The Fed pays a lot of attention to expectations, but they are hardly an accurate forecaster. Former Treasury Secretary Larry Summers said he is more worried about inflation after the jobs report. He said on CNN:

“I think our core problem, which is that we have an unsustainably overheated economy that’s leading to high inflation, which is cutting people’s paychecks, that, unfortunately, has not been addressed by the news in this report.”

He highlighted the fact that wage gains were running at a 6% annual rate in Friday’s report, while inflation was 9%, so that wage-earners are losing ground.

The Bank of England, meanwhile, has created a tempest with its half-point rate hike last week, even though it started the fight against inflation in December and has assiduously raised rates for six consecutive meetings, albeit by a quarter-point or less until last week.

After the UK registered inflation of 9.4% in June, the central bank is now expecting inflation to peak at 13.3% in October, and for recession to set in this year and last for five quarters. This pessimism, predictably, has brought political outrage.

It doesn’t help that the UK is in the midst of a political crisis. After forcing Boris Johnson to announce his resignation as party leader and prime minister, the Conservative Party is trying to select a new leader and foist a new head of government on the long-suffering public without the benefit of a general election.

The leading candidate to replace Johnson, Foreign Secretary Liz Truss, has not hesitated in this situation to take potshots at the Bank of England and suggest that its independence needs to be bridled. Bank of England Governor Andrew Bailey has become a convenient punching bag.

Good News Is Bad News: Strong U.S. Jobs Gains Could Herald Economic Downturn
 

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Good News Is Bad News: Strong U.S. Jobs Gains Could Herald Economic Downturn

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