US jobs-recession paradox

Subject: Economy

Section: National Income

Context:

There is no historical precedent for a recessionary economy to produce 528,000 jobs in a month — as the US economy did in July

Details:

A recession generally caused by an increase of interest rates by the Reserve Bank of a country.
- Rising rates cause systematic risks in the financial system, apart from declining consumption and demand due to higher cost of borrowing which causes decline in the economic activity of the country.
Every US recession since World War II has been characterized by:
- Decline in Gross Domestic Product (GDP) and
- Simultaneous rise in unemployment.
  - Economic contraction and unemployment typically move in together because they feed on each other:
  - When there is a downturn, businesses lay off workers. As a result, people spend less money, which, in turn, dampens demand and lowers profits for businesses. So they lay off more workers, which further dents demand, and this ends up becoming cyclical.
However, presently.
- Economic output in the US is contracting in line with the Fed’s rate-tightening.
- Unemployment rate is 3.5%, which is the lowest since 1970.
- The labour market is also showing record high ratios of new job openings to potential applicants—which points to the fact that companies are still reporting open job postings.

Cause?

Massive inventory glut-given the rush to hoard commodities
Surge in stock market on account of higher corporate earning
Supply shortage given the demand-Excess liquidity, not debt, is the most likely cause for a recession
- It didn’t have the manufacturing capacity to meet the additional demand, but it had triggered the demand by handing over cash to people through a stimulus.
Wage-price spiral
- People expect future prices to be higher and demand higher wages. But this, in turn, creates its own spiral of inflation as companies try to price goods and services even higher due to rise in the cost of production.

Implication-

Less intense recession to the corporate sector
More headroom for monetary tightening till employment starts to decrease
On developing country like India
- When the Fed raises its policy rates, the difference between the interest rates of the two countries narrows, thus making countries such as India less attractive leaving capital outflows.
- A high rate signal by the Fed would also mean a lower impetus to growth in the US, which could be yet negative news for global growth
- Capital outflows follow currency depreciation and widening current account deficit & imported inflation.