Good economic news: Inflation and supply chain issues ease

As we prepare to enter the fourth quarter of 2022, I am pleased to report that the US economy is not in recession – at least not yet.

Official data for the third quarter will be released in a few weeks; however, I have already seen enough to be sure that the US economy is not contracting yet. Without a doubt, the pace of economic growth last summer remained well below the long-term trend, but we currently live in an environment where slowing economic growth is actually a good thing.

Indeed, a slowdown in economic growth is necessary to bring prices down, and so far this momentum is unfolding favourably. The inflation rate in the United States is slowing and should continue to decline. I believe this to be true because commodity prices have fallen sharply in recent weeks and the value of the US dollar is higher. This means that the prices paid for goods in the United States should continue to fall. The downside is that we are now exporting inflation to our trading partners, which may have negative future consequences. But for now, the rate of inflation in the United States is slowing.

A significant exception to this downward trend in overall consumer prices is the continued rise in prices paid in the service sector, particularly the price of rents. Unfortunately, this rental situation will take some time to correct, but we can take comfort in the fact that many other price trends are improving.

Another positive factor that I can share is that the labor market is gradually moving towards a healthier balance. Last month, the labor force participation rate increased while the number of job vacancies fell, and the overall number of jobs recorded a moderate pace of growth. When you combine all these factors, it indicates that the gap between the number of open jobs and the number of workers is narrowing, and a smaller gap will reduce the upward pressure on wages. This will in turn put downward pressure on inflation.

The inflation hawks at the Fed will see that we are off to a good start, but it is still too early to declare “mission accomplished”. Notwithstanding the Fed’s decisions, the macroeconomic environment as described by these three components—GDP growth, inflation rate, and labor market equilibrium—will determine whether the US economy officially enters a recession.

And if we do enter an official full-scale recession, will it be short and shallow or something more severe? Right now, the odds of a soft landing are still pretty good, but like I said, it’s still very early days.

Therefore, let’s not get too carried away just because current trends are mostly favorable, and please don’t think I’m trying to oversell. There are still a number of formidable hurdles in our path to robust economic health. These barriers include adjusting to significantly higher interest rates; a looming energy crisis in Europe, which will have global implications; heightened geopolitical tensions; and a difficult global supply chain situation.