On GPS: Is a recession inevitable?

Could we talk ourselves into a recession?

“If you’re not a little confused about the economy, you’re not paying attention,” former White House economic adviser Jason Furman, who now teaches at Harvard, recently tweeted.
Consumers are extremely pessimistic, but they’re spending more than they did last year, according to the latest retail sales data. The number of jobs is still growing at a healthy clip and unemployment is near record lows, but economic output is slowing sharply. In the first three months of the year, it contracted.

That’s stoking debate among policymakers and investors about whether the United States is close to, or already in, a recession — and if it isn’t, whether persistent anxiety about one could be enough to make it a reality, as nervous businesses and consumers start to pull back.

“I don’t think we should be talking ourselves into a recession,” US Commerce Secretary Gina Raimondo said earlier this month.

Two camps are starting to form. One is epitomized by the White House, which maintains that while the US economy is sliding into a lower gear, it’s not experiencing a recession as we would typically define it.

“This is not an economy that’s in recession,” Treasury Secretary Janet Yellen said Sunday on “Meet the Press.” “But we’re in a period of transition in which growth is slowing.”
Former US Treasury Secretary Larry Summers, in an interview with CNN’s Fareed Zakaria, espoused a different view — this one focused not on what the data is currently showing, but on what’s likely to happen next.

“I think there’s a very high likelihood of recession,” Summers said. “When we’ve been in this kind of situation before, recession has essentially always followed.”

His concerns lie with the Herculean task facing the Federal Reserve. The central bank is rapidly tightening interest rates to throttle inflation, but risks fostering a sharp pullback in economic activity as it boosts borrowing costs.

While the Fed is hopeful it can engineer a so-called “soft landing,” where inflation comes down without a recession, Summers is skeptical.

“When inflation has been high and unemployment has been low, soft landings represent a kind of triumph of hope over experience,” he said.

The final word: One definition of a recession is when the economy experiences two consecutive quarters of negative gross domestic product. In the first three months of the year, output declined at an annual rate of 1.6%. That raises the stakes for Thursday’s first look at GDP data for the second quarter.

The recession call that economists and policymakers watch for, however, comes from the National Bureau of Economic Research’s Business Cycle Dating Committee, which defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

“While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle,” the White House said in a recent blog post.

Big picture: Don’t expect the NBER to settle the back-and-forth any time soon. It waited until June 2020 to announce that the coronavirus-induced recession started the previous February — and that was faster than usual. That means the recession debate is likely to persist for many months, no matter what’s revealed later this week.

In the meantime, business leaders are displaying increasing alarm. The latest Business Conditions Survey from the National Association for Business Economics released Monday found that 43% of respondents think a recession in the next 12 months is more likely than not. Just 13% held this position back in April.

Airlines are making money again despite travel chaos

It’s a nightmare to travel this summer, as long lines, delays and cancellations turn the experience of flying into a huge headache.

But even as costs jump and service disruptions spread, airlines are making money again.

This just in: Budget carrier Ryanair (RYAAY) said Monday that it earned €170 million ($174 million) in the three months to June compared to a loss of €273 million ($280 million) during the same period in 2021. Shares are up almost 2% in early trading.

Demand has rebounded strongly, with traffic surpassing pre-Covid levels, helping offset a huge 560% increase in what Ryanair paid for fuel.

Last week, American Airlines (AAL) and United Airlines (UAL) both reported their first operating profits since the start of the pandemic. But what was good news for investors was bad for customers. What they paid to fly each mile was up just over 20% compared to 2019.

Ryanair said average fares were down 4% compared to the same quarter pre-Covid.

While bearing the brunt of frustration about the state of air travel, carriers are pinning the blame on airports and government officials. They say sluggish efforts to staff back up have led to workers shortages which are triggering long lines.

“They had one job to do and that was to make sure they have sufficient handlers and security staff,” Neil Sorahan, Ryanair’s chief financial officer said Monday in an interview. “They had the schedules months in advance.”

Volkswagen’s disruptive CEO is out of a job

As CEO of Volkswagen (VLKAF), Herbert Diess engineered a huge strategic shift: The 85-year-old German automaker would bet its future on electric vehicles.
Now, in a surprise move, Diess has reportedly been pushed out. In September, he’ll be replaced by Oliver Blume, the head of the Porsche division.

“He is now the right person to lead the Group and to further enhance its customer focus and the positioning of its brands and products,” Hans Dieter Pötsch, chair of the company’s supervisory board, said in a statement.

The big question: What does this mean for Volkswagen’s ambitions? UBS analysts note that under Diess, Volkswagen was the fastest-moving legacy car company to pivot “towards an all-electric future, often drawing comparisons with Tesla and other disruptors.”

VW has said it will dole out €89 billion ($91 billion) over the next five years on developing EVs, accounting for about half of planned spending during that period. It’s aiming for EVs to represent a quarter of sales by the end of 2026.

The team at UBS expect the company will stay the course, seeing a clear direction of travel in terms of customer demand. But investors don’t love the uncertainty. Shares fell in early trading on Monday.

They’ve shed 25% year-to-date, and rose only about 10% since Diess was named CEO in 2018.

On the radar: The company’s luxury Porsche unit had been on track to go public later this year in a highly-anticipated listing, though volatile markets have posed a risk. The leadership shake-up adds to doubts about the timing.

Up next

Whirlpool (WHR) reports results after US markets close.
Coming tomorrow: Earnings from Google’s Alphabet (GOOGL), Microsoft (MSFT), 3M (MMM), Coca-Cola (KO), GM (GM), McDonald’s (MCD) and Visa (V).


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