The next FOMC meeting is scheduled for July 26 & 27. The Committee will be faced with the challenge of assessing whether growth in the second quarter is likely to be negative, triggering the declaration of a recession, or whether growth has persisted. First-quarter 2022 GDP growth was -1.5%, according to the BEA, and the Atlanta Fed’s GDP Now for quarter two stands at -1.2%, which, if realized, would amount to two quarters of negative GDP growth. Not all forecasts are as pessimistic. The minutes for the June FOMC meeting state that the Board of Governors staff had projected GDP to rebound in the second quarter and remain solid through the end of the year, if somewhat weaker than projected in the Board’s May forecast, but still above trend. Similarly, the Conference Board’s forecast is for 1.9% growth this year, but that was an earlier estimate released on June 21 (https://www.conference-board.org/research/us-forecast). More recently, Goldman Sachs released its revised forecast for Q2, cutting its estimate from 1.9% to 0.7% (https://www.cnbc.com/2022/07/07/goldman-slashes-gdp-forecast-for-the-second-quarter-to-just-barely-above-water.html). So, the FOMC is faced with the challenge of trying to decide how much its recent policy moves are impacting growth, inflation and labor markets, and what the risk is of causing a recession while inflation is still high.
The inflation numbers are only available with a lag, and only the May data are available for the FOMC’s preferred measure, PCE. Moreover, there will not be another data point until July 29, after the FOMC’s July meeting. There will be one more data release for CPI, next week. Right now, the inflation numbers – albeit old – are not favorable, as the chart below indicates.
CPI inflation is running at 8.5%, while the PCE has held steady at 6.3 percent for the most recently available two months of data. Anecdotal evidence suggests some prices may be coming down, most notably lumber prices and used car prices. Still, inflation remains far above the FOMC’s target of 2%.
Countering what some believe is a slowdown in the economy is the condition of labor markets. New claims for unemployment insurance have ticked up only slightly, as the chart below shows, ranging between 215,000 to 231,000 in June and into July, and have remained low the last year and a half. The unemployment rate remains at 3.6%, a 50-year low.
More impressive has been monthly job growth, which perhaps belies the views of those who have forecast a significant slowing in GDP growth. Economists had predicted that only 268,000 thousand jobs would be created in June (https://www.reuters.com/markets/us/us-job-growth-likely-slowed-june-unemployment-rate-seen-36-2022-07-08/), but the actual number of 372,000 was surprisingly strong, as the chart below shows.
Gains were positive in all the major categories except government. As the table below shows, there were large gains in Education and Health Services, Professional and Business Services, Leisure and Hospitality, and Transportation and Warehousing. These categories are also those with the largest vacancies in May (June data are not available).
Our review of the current situation suggests that more-current data from the Beige Book will be important in assessing the ability of the economy to deal with further rate hikes. Right now, with a strong labor market and concerns about inflation, the FOMC clearly would have the latitude to hike rates again by another 75 basis points as it frontloads its policy response to the troubling inflation environment.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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