Looking at the US economy, which shows a rapid growth rate of 2% in the second quarter, I wonder if the market is really going well without a recession. Also, the unemployment rate is not high. It was 3.4% in May 2023 and 3.7% in June, which was close to the estimate of 3.5%.
Can a US economy with such strong stamina continue to grow without a recession? Of course, fears of inflation have led the Fed to forecast more than two rates. Rising interest rates will, of course, affect consumer spending by existing households, but so far there seems to be no signs of a recession.
Unemployment and inflation are considered important indicators in the economy and can sometimes be correlated. However, this correlation can be complex and context dependent. In general, there can be a trade-off between unemployment and inflation.
Phillips Curve: One of the hypotheses describing the relationship between unemployment and inflation is the “Phillips Curve”. The Phillips curve analyzes the relationship between the unemployment rate and the rate of wage growth, and the concept is that when unemployment is low, wage growth is higher, which can lead to higher inflationary pressures. In other words, the lower the unemployment rate, the higher the inflation rate.
Supply and Demand: Unemployment and inflation interact according to the supply and demand conditions in the economy. As the economy grows and demand rises, unemployment may decrease, but at the same time inflationary pressures may increase due to tight supply. Conversely, when the economy is in a recession and demand declines, unemployment may rise, which may ease inflationary pressures.
Central Bank Policy: Unemployment and inflation are also related to central bank monetary policy. In general, central banks tend to adjust interest rates to control inflation. If the economy is in a recession and unemployment is rising, the central bank will try to stimulate economic activity and demand by lowering interest rates. However, this could increase inflationary pressures slightly.