Markets watch the swing of the US economy: take flight or fall into recession?

Its trajectory will depend on three essential factors: a vigorous resumption of value chains, paralyzed by the war and the stoppage of activity in China; the fear that rising labor contracts in the US will bring more inflation, and the temporary spread of the increase in the price of the shopping basket and of goods such as housing or vehicles.

The turbulence of the post-Covid cycle, with the war in Ukraine and unleashed inflation as the collateral damage of the onslaught of the complex and unusual take-off in activity after the global health crisis, have reached the flight of the US economy. Between January and March, and despite the good dynamics marked during the first month and a half of the year, until the beginning of the military hostilities unleashed from the Kremlin, the American GDP contracted, in annual rates, by 1.4% according to the first estimate of the Government Economic Analysis Office (BEA, under its acronym in English), after registering a decrease of four tenths compared to the last part of 2021.

The data, in addition to being unexpected, marks the first setback for the world’s largest economy since the Covid-19 pandemic hit the country and caused, in the spring of 2020, a brief but sharp recession and which ended with the longest phase of prosperity -in total, 129 months of uninterrupted increases, since June 2009- of the recent history of the USA. And it confirms that the inflationary spiral has collided fully and in the middle of the route, with an aircraft that showed signs of having entered an enviable cruising speed after massive vaccinations.

The market consensus anticipated a tenuous but positive growth of 1.1%, as reported by the Bloomberg agency, which already revealed a substantial slowdown when compared to the rebound of 6.9% in the fourth quarter of 2021; no less than 1.7% more than between July and September. The summer showed the vigor of the US GDP, almost in all its splendor. However, with the arrival of autumn, the leaves began to wobble. Inflation arose, which is now swarming at its maximum of the last 41 years, and its expansive spiral, along with the persistent blows of the Ómicron variant on the labor market -by way of sick leave- not only ends the interpretation of temporality that emerged in the Federal Reserve, but has penetrated the conjuncture like a battering ram. Precisely the dysfunctionality that manifests itself within the intense American labor market is, like the distortion between supply and demand in the markets for goods and services, caused by the escalation of prices and the productive alterations in factories and companies, the factors that can determine that the American GDP leans towards recession or, on the contrary, resumes flight and consolidates its road map.

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The analytical reading of the Beige Book of the Federal Reserve points to the complex climatology that devastates the American situation. With the prices of energy, food, vehicles, household utility bills, and the housing market constantly rebounding, fueling a CPI that climbed to 8.5% in March, but it would leave the control of monetary policy in a difficult dilemma. Anticipate and accelerate several increases in interest rates -as the Fed had hinted at in its first move to move them away from zero- which the market places at around eight quarter points or request now, with the contraction in the first quarter, a downtime to revive activity. Last week he gave signs that curbing inflation is his main concern, with the rise of half a point in the price of money.

Although the evolution of the GDP in the quarter of the start of the war has been disappointing for many reasons. Because signs of vigor are emitted that are combined with other headings, such as the drop in exports, worrying and with unflattering omens, such as the loss of product stock and the difficulties of companies to restore their inventories. And despite the fact that these concerns translate into doubts about three unknowns to clear up. Three risks with high latency that show the difficult walk of the American economy through the recessive abyss.

Global supply chains can push GDP into the red. It is still difficult to guarantee containers and supplies. Despite the decongestion of the last part of the year and the beginning of 2021, the supply-demand balance continues to be altered and consumption is shrinking. As with Delta, the variant that lit the fuse of bottlenecks and the logistics crisis, in the middle of last year. Now, to a large extent, due to the consequences of the social confinements in three of the big Chinese cities due to the restrictive Covid-zero policy: first, Shenzhen, then Shanghai, and now Beijing. The technological, financial and port and administrative centers of the Great World Factory. Delays in maritime transport, new increases due to container transfers and signs of suspension of production chains. In a climate of war in Ukraine that has forced the diversion of logistics routes, three of the largest manufacturing hubs on the planet have altered their value rhythms.

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This scenario has led to inflation in the US, whose consumption, which forms the most important heading within an internal demand that accounts for three quarters of its GDP, has suddenly come to a standstill and, with it, confidence, first, and activity , later, of its private sector. These two headings household consumption and business investment could perfectly push the US economy into recession. Above all, if, as it seems, deglobalization is beginning to make its appearance, with two trade blocs – the US and China – in the decoupling phase.

Distortions in the American labor market. Employers are still so desperate to hire that they continue to offer fat salaries. An additional fuel to boost inflation. But the more than 4.3 million Americans who quit their jobs in January -4.4 in February- essentially because they do not receive enough pay to afford their standard of living -argue those who have joined a phenomenon known as the Great Resignation – threaten to nullify part of the 11.3 million job offers that ended up not being filled on the days when the armed conflict broke out in Ukraine, within the phase of the strongest job creation in history from the country. Three times more than after the Great Recession of 1929.

Despite this, employment is still below the level prior to the Great Pandemic. To the caution of Jerome Powell, who admitted that, “of course”, he “welcomed the participation of the labor force”, but also believed “that any salary pressure today would put inflationary pressures even more at risk” .

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Prices have not said their last word. It is the feeling that spreads in the market because the CPI is the main obstacle to consolidate the recovery and the greatest threat that, quite the contrary, the GDP falls into recession. Several trends anticipate this. It is the escalation with the greatest virulence since 1981. Stimulated by diverse factors, from the interruption of value chains, to labor pressures, the Russian invasion of Ukraine and the sanctions from the western orbit, the confinements in China, the jump in energy, metal and food raw materials and the resumption of the logistics crisis. All of them in a permanent state of alteration.

The Fed, which was clear about the message of gradual and constant rate hikes in March, seems to have given up taking any kind of breather to catch its breath from the contraction in GDP; essentially, because it still doesn’t hurt job destruction. However, it could be less aggressive in future months of higher money prices. Given the another drastic and rapid increase could weaken demand and paralyze business investment projects. Without there being sufficient guarantees that they will freeze inflation. Because, as Bill Dudley, former president of the New York Fed, admitted in an opinion piece in Bloomberg, “the inflationary spiral and the damage to the economy are now virtually inevitable.”

“The risks that lie in wait for the situation are now seen with total clarity and with little bias and point to a sharp drop in activity with a severe threat of recession,” says David Folkerts-Landau, former member of the Executive Committee of Deutsche Bank, who , however, sees some light in the inflationary tunnel due to the drop of two tenths of the core CPI, a rate that excludes energy and food, and which stood at 5.2% in March. “It could be a sign that inflation has been able to peak” and reinforce the thesis that it is still possible for the economy to increase its activity.

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