Source: Golden Ten Data
Federal Reserve officials have already initially accepted the possibility of curbing inflation without triggering a recession.But this week they will face issues such as an auto workers' strike, a possible federal government shutdown, and a possible contraction in spending due to student loan repayments, all of which pose new risks to the best results.
First, the United Auto Workers (United Auto Workers) launched a strike against the three major automakers on Friday. At first, about 13,000 employees from the three factories participated in the strike, but the number of people on strike is likely to increase; second, the federal government will only come up with a new agreement before the current spending authorization expires on September 30, otherwise federal agencies will have to close, but congressional Republicans have blocked negotiations; furthermore, after being suspended for three years during the 2019 pandemic, student loan repayments will resume in October.
Taken alone, none of these events are likely to change policymakers' views on short-term risk, or their focus on curbing inflation, which remains high.
However, since the economy is expected to slow down in the last few months of this year, the long-term shutdown of the automobile industry and federal agencies may have unpredictable results, including boosting car prices, thereby cracking down on the Fed's inflation struggle, and weakening consumption, causing a blow to business and consumer confidence.This could cause the economy to move from a “soft landing” to a recession.
Will the economy experience a “depression” in the fourth quarter?
Since millions of consumers will resume repayment of student loans in October, which will squeeze out their other expenses, Goldman Sachs economists have moderated their generally optimistic outlook, they warned,The “low-lying” in the fourth quarter may drag down gross domestic product (GDP) growth by more than 1 percentage point.
Goldman Sachs estimates that the US economy will still grow at an annual growth rate of 1.3% at that time. This forecast will exceed the 1% growth rate predicted by Fed officials up to June, as well as many public predictions.
Vincent Reinhart (Vincent Reinhart), chief economist at Dreyfus and Mellon and former head of the Federal Reserve's monetary policy department, said that since the Fed's sharp interest rate hike still plays a role in the economy, banks have tightened credit, and consumers have exhausted their savings during the pandemic.It probably won't take much effort to derail the economy.
Reinhart said,The contraction in the Fed's balance sheet has now reached a level that could unexpectedly tighten the financial situation, which would be an added risk. He stated:
“The recession comes from an impact on economic fragility. If you are in the latter stages of an austerity cycle, interest rates are restrictive, and buffers have been exhausted, then the economy will be even more vulnerable. This kind of incident wouldn't have happened a year ago.”
Since the Fed already expects to keep the policy interest rate between 5.25%-5.5% at the September 19-20 meeting, any emerging risks may only change the atmosphere and wording of the meeting.
At any rate, central bank governors are currently providing little guidance on upcoming decisions. The Fed began raising interest rates in March 2022 to ward off high inflation, and now they may be ending interest rate hikes, but they are not ready to say for sure that interest rates have peaked, or suggest when they might cut interest rates, partly because they disagree about the next step.
Economic data from recent months is generally favorable to the Fed. Although the economy continues to grow at a rate higher than the trend level, and the number of new jobs added every month is impressive, inflation is declining.
However,The shutdown of two major industries — the possibility of as many as 146,000 auto workers on strike and 800,000 federal employees not getting paid will weaken economic growth and consumer confidence.
Analysts worry that the dispute between the two industries is likely to continue.
Michael Pearce (Michael Pearce), chief US analyst at the Oxford Institute of Economics, said, “This special situation means that the impact of any strike is likely to be particularly disruptive,” the automobile supply chain is still in trouble due to the pandemic. At a time when industry profits are at record levels, workers are trying to recover their wage purchasing power lost due to inflation, and negotiations are expected to be very intense.
If the scope of the strike expands, automobile production may be reduced by one-third. Considering the ripple effect of the entire economy, as long as the strike continues, the economic growth rate will drop by 0.7 percentage points——For an economy with an estimated trend growth rate of around 1.8% per year, this is a huge figure.
Although most of the government shutdowns were relatively short in the past, the last government shutdown from the end of 2018 to the beginning of 2019 continued for five weeks. According to Goldman Sachs estimates,Every week we close our doors, we lose 0.2 percentage points of GDPA five-week shutdown meant a 1% reduction in annualized output.
But its dynamics are difficult to predict. According to some analysts,A crackdown on consumer spending may even help curb inflation.This type of event often causes economic growth to slow for a period of time, but then the economy rebounds as workers receive arrears and higher wages.
A report from the Congressional Budget Office (CBO) on the last government shutdown found no lasting impact.
But when households and businesses start cutting expenses at the same time, the inflection point is also difficult to predict. According to some economists,Resuming student loan repayments to tens of millions of borrowers may already be reshaping people's behavior.
Ian Shepherdson (Ian Shepherdson) and Kieran Clancy (Kieran Clancy) of Pantheon Macroeconomics pointed out this week that the US Department of Education's spending has increased dramatically. At the same time, “online searches for 'airline tickets', 'restaurant reservations', and 'new cars' have declined, the number of daily airline passengers has declined, and there is no sign of any other hard data showing any improvements in the near future.”
Although retail sales increased more than expected in August, it was almost all due to rising gasoline prices. Other sales increased by just 0.2%.
Reinhart said,If the economy actually reaches an inflection point, the Fed will not take rescue measures until the fight against inflation is over, which will further put pressure on businesses and households.
“They are always living at risk of recession,” he said. “They've been preparing for this for a year and a half.”