Treasury Secretary Janet Yellen believes that the economy is not in crisis: "We have a very strong labor market. This is not an economy that is in recession," she said during CNBC's Meet the Press. Yellen cited other aspects of the economy that would demonstrate the strength of the economy right now: consumption is growing and household finances are solid.
On the labor market, the unemployment rate is at 3.6%, and the number of people claiming unemployment benefits is at 1,384,000, less than half of what it was a year ago. Then there were 3,116,000 employees claiming the benefit. 1.732 million more than now. Wages are growing at 11.0%, so on average workers can avoid the loss of real income.
And economic activity, as measured by Markit's Purchasing Managers' Index (PMI), still indicates expansion, as it is above 50 points: 52.3 in the industrial PMI, and 55.3 in the non-industrial.
But there are several data points that indicate that the country's economic situation is far from robust. The most important of these is inflation, which continues to accelerate: it has risen from 8.6% to 9.1%. During the month of June alone, prices rose 1.3 points. Inflation is the swan song of the economy: when it appears, it is certain that the economy is heading for recession.
Inflation can only be curbed by contracting demand, and there are two economic policy tools for this purpose: fiscal and monetary policy. The Biden Administration has not said that it is going to cut spending to curb inflation, but the Federal Reserve is already pursuing a policy of raising rates, which will eventually affect demand and the economy.
More warning signs
But there are also other data that show that the economic situation is not as strong as the Treasury Secretary claims. GDP is declining: it fell 1.6% in the first quarter. The Atlanta Fed expects the same GDP decline in the second quarter.
Other leading indicators of activity also point to a recession. The S&P composite PMI is in negative territory for the first time in two years. Half of businesses, 51%, believe that inflation will force them to close in the next six months. As for households, inflation is forcing them to consume their savings.