Joe Biden Says US Recession is Not Inevitable: S&P500 Gains 1.5% on Open
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Joe Biden Says US Recession is Not Inevitable: S&P500 Gains 1.5% on Open

US President Joe Biden believes an economic recession is not inevitable as the job market and consumer spending remain robust.
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With the three most widely-followed US indices experiencing their worst stretch of losses in decades, it is undeniable that the outlook for markets looks gloomy. In fact, some economists have already warned that the US economy could be heading for a recession within the next year. 

However, US President Joe Biden does not seem to believe an economic recession is forthcoming, claiming that there has been strong growth in terms of employment over the last months. The stock market opened in green today, showing some signs on recovery from the brutal sell-off over the last few weeks.

Soaring Inflation and War in Europe leads to Historic Market Rout in the US

US inflation hit 8.3% last month, slightly dipping from the 40-year high of 8.5% recorded in March. Nevertheless, consumer prices are at a record high, pressuring the Federal Reserve, whose mission is to ensure economic stability, to try to stamp out inflation by hiking rates. 

In mid-March, the central bank announced its first rate hike in more than three years, a 0.25 percentage point move. In early May, the Fed raised interest rates by another 0.50% and revealed that it will further raise borrowing costs throughout the year. The Fed also announced a strategy to shrink its asset holdings, saying that beginning June 1, it will allow up to $47.5 billion a month to roll off its balance sheet.

Moreover, the war in Ukraine and Covid lockdowns in China are adding to the concerns. That is because the lengthening war in Ukraine and new lockdown measures in China could easily exacerbate supply chain bottlenecks, adding additional pressure to the already fragile world economy. 

This has already led to a historic rout in the stock market. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, the three major equity indexes in the US, are experiencing their worst stretch of losses in years. 

More specifically, the Dow last week posted its eighth straight weekly loss, its longest weekly losing streak since 1923. The S&P has lost more than 20% from its record high, even falling into the bear market territory. Likewise, the Nasdaq has dropped more from its peak last November than when the world shut down in spring 2020. 

The rout has also found its way into the crypto market. Bitcoin, currently consolidating at around $30,000, is down by over 23% over the past month, and down by around 56% compared to its all-time high. Cumulatively, the crypto market has lost over $600 billion in market cap over the past month. 

Consumer Spending and US Employment Still Strong, Biden Claims Recession is Not Inevitable

Despite increasing concerns around recession risks, consumer spending is still quite strong in the US. According to Census Bureau data released last week, retail spending rose 0.9% in April with restaurants, bars, and automobile dealers accounting for the majority of that increase. 

Specifically, consumers are willing to spend more on airline tickets and other forms of transportation, in part due to soaring gas prices. Spending at e-commerce and department stores has also seen an uptick. On the other hand, spending dropped off at hobbies, sporting goods, books, and home supply stores.

Beth Ann Bovino, a US economist at S&P Global, said that consumers are spending pent-up savings during the pandemic. “We were pretty much stuck at home for almost two years and a lot of that discretionary spending wasn’t spent. People are still sitting on cash and that means they can be more resilient at this time,” she said. 

Besides spending, US employment has also been strong. The US seasonally adjusted jobless rate for April 2022 was 3.6%, unchanged from March 2022, according to the U.S. Department of Labor. Notably, some states have reported their lowest unemployment rate in years. 

Arguably, this is why President Joe Biden does not believe an economic recession is around the corner. Speaking in Tokyo, Biden acknowledged the U.S. economy has “problems” but said they were “less consequential than the rest of the world has.”

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All Eyes on How the Fed Acts

As pointed out by Deutsche Bank economists, the Fed might have to raise rates aggressively to fight the soaring inflation, an action that would lead to a recession. “We will get a major recession,” Deutsche Bank economists wrote in a report to clients last week, adding

“We regard it… as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel.” 

However, echoing Biden’s point of view, Goldman Sachs has claimed that a recession is “not inevitable.” The bank noted that it will be “very challenging” to bring down high inflation and wage growth, but said growth would need to slow, which would again bring recession risks. 

“We do not need a recession but probably do need growth to slow to a somewhat below-potential pace, a path that raises recession risk.”

The US market opened to see gains across all indicies with S&P500 gaining 0.9% and DOW within 25 minutes of trading.

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Do you think the US is heading towards a recession and can it be avoided? Let us know in the comments below.