Treasury Secretary Janet Yellen believes that the economy isnt in a recession, and the latest gross domestic product numbers prove it.
U.S. GDP grew 2.6% in the third quarter, marking a turnaround after two consecutive quarters of contraction to start the year.
What were seeing right now is solid growth this quarter, Yellen told CNN. We have a very strong labor market. I dont see signs of a recession in this economy at this point.
But while Yellen believes that the latest GDP numbers are evidence of strength, and a sign that the Federal Reserves efforts to reduce inflation are not significantly hurting the economy, other top economists argue that the figures are misleading and complain that the Fed may be overdoing it with interest rate hikes.
The U.S. economy has continued to weaken, but once again, the top-line GDP number is hiding some of this weakness, Raymond James chief economist, Eugenio Alemán, told Fortune, pointing to the fact that GDP was boosted by 2.8 percentage points due to the shrinking trade deficit last quarter.
Comerica Banks chief economist, Bill Adams, explained that a smaller trade deficit adds to GDP because it means more American spending is on goods and services produced here versus in other countries.
Nobel Laureate Paul Krugman also argued on Thursday that while the U.S. may not currently be in a recession, there is evidence that the economy will shrink from here.
While this report made all the people who screamed recession! look as foolish and partisan as they were, it was not, if you look under the hood, a sign that the worst is over, he wrote on Twitter. It suggests, at least to me, that theres a lot of contraction still in the pipeline.
In a separate tweet, Krugman, like Alemán, argued that the shrinking trade deficit was the main driver of the positive GDP figure, and that the strong dollar should reduce the benefit of the trade deficit in coming quarters as U.S. producers become less competitive on the global stage.
While the dollar has been outperforming most currencies throughout the year, Krugman noted that there are long lags in the effects of exchange rates on trade, which means that the trade deficit will likely be a significant drag going forward.
Krugman added that the Federal Reserves interest rate hikes also mean that the housing market will continue to slow, which should reduce GDP.
Mortgage applications are down 70%, so a large housing slump is already baked in. If it hasnt shown up yet, just wait, he wrote.
Yellen, on the other hand, argued that the U.S. economy is still in a strong position, with unemployment at a 50-year low of just 3.5%, and consumer spending proving to be resilient.
Despite inflation and poor earnings from retailers like Amazon, consumer spending increased 0.6% in September, according to the Bureau of Economic analysis.
Yellen also noted that U.S. households are in a strong position compared to their European peers, and that U.S. banks are well capitalized, which means theyre better prepared to cope with an economic slowdown.
If you look around the world, there are a lot of economies that are really suffering not only from high inflation but very weak economic performance, and the United States stands out, she said.
Yellen went on to stand by the policies of the Biden Administration, arguing that they helped enable the impressive recovery of the labor market post-COVID compared to other developed economies.
There were several problems that we could have had, and difficulties many American families could have faced, she said. These are problems we dont have, because of what the Biden administration has done. So, often one doesnt get credit for problems that dont exist.
Still, Yellen has previously admitted that the Federal Reserve will need both great skill and good luck to defeat inflation without sparking a recession.
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