Good and bad news from the USA – 07/28/2022 – Nelson Barbosa

This week, the US economy has given us both good news and bad news. Following the tradition of starting with the bad news, the US economy entered a technical recession, that is, two quarters of GDP decline.

The result was contrary to government and market expectations, which had expected slightly positive growth in the second quarter. There was a drop of 1% annually (0.25% quarterly). As there was also a fall in the first quarter of 2022, a technical recession is set.

What were the determining factors? On the fiscal side, there was an end to the stimuli adopted to fight the pandemic, pulling the economy down.

According to the Hutchins Center (HC) fiscal impulse estimate of the Brookings Institution, available online, US fiscal policy became contractionary in late 2021 and the maximum degree of tightening happened exactly in the second quarter of 2022 (the “fiscal cliff”. , as they like to say).

Also according to the HC, fiscal policy there should remain contractionary until the end of 2023, but this could change due to a Biden agreement, as I will explain further below.

On the monetary side, rising inflation, driven by the strong US recovery in 2021 and the adverse supply shocks of recent months, is eroding the purchasing power and confidence of US households. The recent interest rate hike by the Federal Reserve (Fed or the Central Bank there) also has a recessive impact, but its effect has not yet fully materialized.

Looking ahead, even with a technical recession, the market, the IMF and other specialized sources expect the US to grow slowly again in the second half of the year and end 2022 with an expansion between 1% and 2%, due to the inertia of the “V” recovery in 2021 (what we economists call statistical loading or carry-over).

And what’s the good news? In fact, there are two. First, the further increase in US interest rates is likely to be smaller than expected.

This week, there was a 0.75 percentage point increase in Fed Funds (their Selic), putting the US interest rate ceiling at 2.5% per year. For October, the Fed said there will be another increase, to 3%, and expectations were that this would continue until Fed Funds surpasses 4%.

Now, given the slowdown in US economic activity, the Fed Funds are more likely to stop between 3% and 3.5%, which implies less pressure for the depreciation of the real and reduces the need to raise the Selic rate here.

The second good news from the US is still uncertain, but, as an optimist, I will believe that Senator Joe Manchin has finally decided to support his party’s government and approve Biden’s investment increase request before the Republicans regain control of the North American Congress.

Specifically, this week the Democratic base in the US Senate said it will pass an additional fiscal stimulus of $430 billion in investment in health, energy and the environment, along with a review of tax exemptions and a greater fight against tax evasion.

By the Democrats’ calculations, the measure will reduce the US public deficit in the long term, but with a stimulus to green investment and increased productivity. For this reason, Biden’s new initiative also helps fight inflation further ahead and reveals North American pragmatism: combining short-term actions (monetary policy) with long-term actions (investment plan and gradual fiscal rebalancing) in the fighting inflation.

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About Yadunandan Singh

Born in 1992, Yadunandan approaches the world of video games thanks to two sacred monsters like Diablo and above all Sonic, strictly in the Sega Saturn version. Ranging between consoles and PCs, he is particularly fond of platform titles and RPGs, not disdaining all other genres and moving in the constant search for the perfect balance between narration and interactivity.

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