As Americans Fear Looming Recession, Yellen Explains What Sets This Economy Apart from Downturns

Mandatory Credit: Photo by Jacquelyn Martin/AP/Shutterstock (13053878aa)Treasury Secretary Janet Yellen speaks about the economy during a news conference at the Treasury Department, in WashingtonYellen Economy, Washington, United States - 28 Jul 2022.
Jacquelyn Martin/AP/Shutterstock / Jacquelyn Martin/AP/Shutterstock

Treasury Secretary Janet Yellen said that the U.S. economy was in a “transition,” not a recession. Her remarks followed the release of the real gross domestic product (GDP) on July 28, which decreased 0.9% in the second quarter, according to the Bureau of Economic Analysis (BEA), following the first quarter decrease of 1.6%. This turn of events would technically mean that the economy is in a recession.

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During a press conference, Yellen said that “most economists and most Americans have a similar definition of a recession: substantial job losses and mass layoffs, businesses shutting down, private sector activity slowing considerably, family budgets under immense strain. In sum: a broad-based weakening of our economy.”

“That is not what we’re seeing right now when you look at the economy. Job creation is continuing, household finances remain strong, consumers are spending, and businesses are growing,” she said, according to the transcript of her remarks.

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Yellen added that it’s important to look beyond the headline number to understand what’s happening, as the contraction in GDP was driven primarily by the change in private inventories, a volatile component of GDP that subtracted over two percentage points off quarterly growth.

“Today’s report shows continued expansion in consumer spending overall and in services in particular, in addition to notable strength and net exports,” she said. “Overall, with a slowdown in private demand, this report indicates an economy that is transitioning to more steady, sustainable growth. This path is consistent with one that eases inflationary pressures while maintaining the labor market progress of the past 18 months.”

Edward Moya, Senior Market Analyst, The Americas OANDA, wrote in a note sent to GOBankingRates that “the U.S. economy is weakening much faster than anyone expected,” with the second quarter GDP down 0.9% being much worse than the consensus estimate of a gain 0.4%.

“The massive hit to growth was mainly driven by a 2.0% hit from inventories. Consumer spending is cooling, but still remains supportive for modest growth in the economy,” Moya wrote.

Moya added that while the U.S. relies on the National Bureau of Economics to declare a recession, “for many the basic view of a recession is two consecutive quarters of contraction.”

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“What everyone can agree upon is that the economy is slowing rather quickly and that will keep the pressure on the Fed to tighten as much as they possibly can before they will need to go on hold,” he said. “Initial jobless claims confirmed its upward trajectory but remain at relatively low levels. There is a lot of noise with jobless claims, especially considering the shutdowns with many auto manufacturers.  The labor market is cooling, but is still a bright spot of the economy.”

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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