The recession should have already started.
Last year, as policymakers relentlessly hiked interest rates to combat the fastest inflation in decades, forecasters said a recession (an economy contracting, not growing) was not a “what if” question. He started talking as if it was a question of when. Probably 2022. Probably early 2023. definitely by the end of the year. As recently as December, he was less than a quarter of economists who expected the US to avoid a recession. Found Findings.
But the year is more than half over and there are no signs of a recession. Of course, that’s not the case in the job market, where the unemployment rate is hovering near a 50-year low at 3.6%. It’s not about growing consumer spending or solid corporate profits. The housing market, which is usually most sensitive to rising interest rates, is also showing signs of stabilizing after last year’s slump.
At the same time, inflation has slowed significantly and is expected to continue to cool, leading to hopes that rate hikes are coming to an end. All of this has led economists to wonder if a recession is coming at all, after spending a year marveling at the resilience of the recovery.
Diane Swonk, chief economist at KPMG US, said that inflation could be contained without triggering a recession. Stated. “I’m more optimistic than I was six months ago. That’s good news.”
People are feeling better, but they are not excited. measures consumer confidence picked up Recently, investigation This shows that most Americans still expect a recession or believe the country is already in recession.
Swonk pointed out that there are still many issues that could go wrong. Inflation may once again prove to be more stubborn than expected, and the Federal Reserve may force rate hikes to keep inflation in check. Or, conversely, actions already taken by the Fed could have a delayed effect, sharply cooling the economy in ways that haven’t yet surfaced. And even a slowdown leading up to a recession can be painful, leading to layoffs that are likely to hit black and Hispanic workers unfairly.
“Softness is up to the eye,” says Nick Bunker, director of North American economic research at job site Indeed.
Economists are wary of declaring victory prematurely, but perhaps they are burning with past episodes of doing just that. For example, in early 2008, a series of positive economic data led some forecasters to conclude that the United States had managed to weather the subprime mortgage crisis without slipping into recession. Researchers later concluded that it had already begun.
But for now, at least, talk of a worst-case scenario—runaway inflation that the Fed struggles to contain, or “stagflation,” in which prices and unemployment rise in tandem—gives to cautious optimism. be.
“We’re seeing a series of big shocks, and we can’t predict what’s going to happen,” said Lael Brainard, the White House’s chief economic adviser, in an interview last week. “But so far the data are very consistent with easing inflation and a still resilient job market.”
Inflation has come down.
Economists are optimistic for two main reasons.
The first is inflation itself, which has cooled rapidly in recent months. The consumer price index in June was up only 3% from a year earlier, compared with a high of 9% in the summer of the previous year. This is partly a result of factors that are less likely to be repeated. For example, no one expects oil prices to continue to fall at a rate of 30% per year.
But measures of underlying inflation also show significant progress. Consumers and businesses also appear to expect inflation to return to normal over the next few years, making inflation less likely to be baked into the economy.
With inflation under control, the Fed could continue to slow its rate-hiking campaign, or even halt rate hikes altogether earlier than planned. That could reduce the chances of policymakers overdoing it to contain inflation and accidentally triggering a recession.
“Things are going the way they need to for a soft landing,” said Louise Scheiner, a former Fed economist who now works at the Brookings Institution. “It’s not guaranteed, but it’s certainly more likely than if inflation were still 7%,” she said.
The job market is showing resilience.
A second reason for optimism is the gradual cooling of the labor market from boiling to intense simmering.
The rapid reopening of the economy in 2021 has created a large imbalance between supply and demand. Restaurants, hotels, airlines, and other businesses suddenly had hundreds of thousands of jobs without enough people to fill them. For workers, this was a rare moment of leverage, resulting in the fastest wage growth in decades. But economists worried that such a rapid rise could make inflation difficult to control.
But in recent months the frenzy has subsided. Employers don’t post that many vacancies. Employees aren’t as free to move from job to job in search of higher salaries. At the same time, millions of workers are joining or re-entering the workforce, helping to alleviate labor shortages.
So far, however, that easing has come without a significant increase in unemployment. The unemployment rate is about the same as the strong labor market before the pandemic. While some industries, such as technology and finance, laid off workers, most found other jobs relatively quickly.
“The overheating in the labor market has abated significantly to a point where it is no longer a concern,” said Jan Hatzius, chief economist at Goldman Sachs.
Mr. Hadzius, who has long been more optimistic about the prospects for a soft landing than many of his Wall Street peers, cut his estimate of a recession to 20% on Monday from 25%. He said recent developments in inflation and the labor market, as well as in consumer spending and other areas, suggest the economy is slowly overcoming the turmoil of the past few years.
“We are looking at the other side of the pandemic,” he said. “The pandemic has created such a huge disruption to the economy, but I think it is now winding down. That is a top priority for me.”
Risk remains.
Still, many economists aren’t so optimistic. Inflation, at least excluding volatile food and energy prices, is well above the Fed’s annual target of 2%, standing at 4.8% in June. And while the inflation run so far may have been relatively painless, there is no guarantee it will continue, with employers who initially cut staff in response to rising interest rates. It may soon begin a complete layoff.
“I think it’s too early for people doing victory laps to declare a soft landing,” said Lawrence M. Ball, an economist at Johns Hopkins University, in a paper last year. influential papers It concluded that it would be difficult for the Fed to bring inflation back to 2% without a significant increase in unemployment.
Part of the problem is that the Fed has little room for error. Central banks could push the economy into recession if they act too aggressively to keep inflation under control. Too little action could cause inflation to pick up again, forcing policy makers to tighten the grip.
Neil Dutta, head of economic research at Renaissance Macro, said a strong labor market would encourage a new acceleration in the economy, prompting a resumption of rapid price increases—the “inflationary boom” that has reversed much of recent progress. He said he was worried that they might be connected.
“Inflation looks pretty good over the next three to six months. It will feel like a soft landing,” he added. “The question is what happens after that.”
Second, there are factors beyond the control of policy makers. Oil prices soared last year when Russia invaded Ukraine, and they could soar again. Food prices may start rising again. That possibility became more real this week after Russia scrapped a deal allowing Ukraine to export grain to the Black Sea.
With the economy already slowing, even relatively small progress, such as the impending resumption of student loan repayments that strain the finances of many young people in particular, could be enough to throw the recovery off track, he said. Chief Economist Jay Bryson said. Wells Fargo.
“Student loans by themselves aren’t enough to trigger a recession, but if you do, it can be like dying with a thousand pieces of paper,” he said.
Bryson still expects a recession to start this year. But his confidence has waned in recent months. He recently asked about 20 people on his team to write down how likely they think there is a recession next year. Responses ranged from 30 percent to 65 percent for him, with an average of just 50 percent. This is the odds of a soft-landing coin toss that many once thought impossible.
“Keep the champagne on ice,” said Mr. Bryson. “Hopefully we can start doing that early next year.”
