- Because of continued high inflation and the Fed’s actions to slow the economy, we now expect slower growth compared to what we forecasted at the end of May. Real GDP growth in Q2 2022 and for the remainder of the year is likely to be weak as the Fed continues to tighten monetary policy.
- Commodity prices, including oil, have started coming down, so there are some signs inflation may have peaked, and even gas prices at the pump might start easing. Still, inflation is likely to remain stubbornly high and inflation expectations, measured by 5-year breakevens** remain elevated, above 2.5%, as shown in Figure 1. Our forecast for quarterly CPI inflation, at seasonally adjusted annual rates, is shown in Figure 2.
- How can the economy be slowing when employment growth remains strong? And can the economy contract even as employment continues to grow? Actually, changes in employment tend to lag changes in output. Employment often peaks in the middle of recessions, not necessarily before recessions start, as shown in Figure 3. Because hiring and firing is costly, it takes time for businesses to lay off workers in response to a decline in demand. Businesses first tend to pause hiring, then they reduce workers’ hours, and only once there’s more certainty that a sustained decline in demand is occurring do they tend to lay off workers. It’s not inconsistent for employment to keep growing – but at a slower rate – even at the beginning of recessions.
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*http://uclafacultyassociation.blogspot.com/2022/06/ucla-anderson-forecast-says-not-to.html.
**"Breakevens" are comparisons between ordinary U.S. Treasury bonds of a particular duration and inflation-adjusted U.S. Treasury bonds of the same duration. The difference in return is an implicit forecast of inflation over that duration.
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Editorial Note: First-quarter real GDP was estimated to have dropped. We are awaiting the official second-quarter estimate. So far, however, as measured by the latest unemployment rate (June) that was released today, the labor market has not show signs of a downturn although employment is still below its pre-pandemic peak. The latest unemployment rate and other associated estimates are always at https://www.bls.gov/news.release/pdf/empsit.pdf.
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