It was believed that the recession would have started by now.
Last year, as policymakers steadily raised interest rates to combat the fastest inflation in decades, forecasters began to talk as though a recession — economic contraction rather than growth — was not a “if” but a “when.” ” was the question. Possibly in 2022. Possibly in the first half of 2023. Definitely by the end of the year. As recently as December, less than a quarter of economists expected the United States to avoid recession. survey found,
But more than half of the year has passed and the recession is nowhere in sight. Certainly not in the job market, as the unemployment rate, at 3.6 percent, is hovering near a five-decade low. Neither in consumer spending, which continues to grow, nor in corporate profits, which remain strong. Not even in the housing market, this industry is typically the most sensitive to rising interest rates, which have shown signs of stabilizing after declining last year.
At the same time, inflation has slowed significantly, and will remain subdued – raising hopes that interest rate hikes may be coming to an end. These are leading economists who, after a year of surprising the resilience of the reform, are wondering if a recession is on the way.
“The potential for a soft landing is high — there’s no question about it,” said Diane Swonk, chief economist at KPMG US, referring to the possibility of reducing inflation without causing an economic recession. “I’m more optimistic than I was six months ago: that’s good news.”
The public is also feeling more sunny, though far less enthused. measures consumer confidence raised However, recently Survey Show that most Americans still expect a recession, or believe the country is already in recession.
There’s still a lot that could go wrong, as Ms. Swonk noted. Inflation may, once again, prove more stubborn than expected, forcing the Federal Reserve to raise interest rates to curb it. Or, on the other hand, steps already taken by the Fed could be delayed, leading to a rapid cooling of the economy that has not yet unfolded. And even a recession milder than expected could be painful, leading to layoffs, which are most likely to disproportionately affect black and Hispanic workers.
“Soft is in the eye of the beholder,” said Nick Bunker, director of North American economic research at career site Indeed.
Economists are wary of prematurely declaring victory – perhaps haunted by past incidents in which they have done so. For example, in early 2008, a series of positive economic data led some forecasters to conclude that the United States had managed to overcome the subprime mortgage crisis without falling into recession; Researchers later concluded that one had already begun.
But for now, at least, talk about the worst-case scenario — runaway inflation that the Fed is struggling to control, or “stagflation” in which prices and unemployment rise together — is reducing the conversation to cautious optimism. Has been
“We’ve seen several big shocks, so I can’t predict what will happen in the future,” Lael Brainard, the White House’s top economic adviser, said in an interview last week. “But so far, the data is consistent with a softening of inflation and a still-resilient job market.”
Inflation has come down.
Economists have become more optimistic for two main reasons.
The first is inflation itself, which has come down sharply in recent months. The consumer price index in June was up only 3 percent from a year earlier, compared to a peak of 9 percent last summer. This is partly the result of factors that are unlikely to recur – for example, nobody expects oil prices to keep falling at 30 percent a year.
But measures of underlying inflation have also shown significant progress. And consumers and businesses expect price increases to normalize over the next few years, making it less likely that inflation will become embedded in the economy.
With inflation low, the Fed may continue to slow down its campaign to raise interest rates, or perhaps even stop raising rates altogether, ahead of schedule. This can make it less likely that policymakers go too far in their efforts to control inflation and accidentally cause a recession.
Former Fed economist Lewis Sheiner, who is now at the Brookings Institution, said, “Things are going in the direction you need to go in order to get a soft landing.” “It doesn’t mean you’re guaranteed to get it, but it’s certainly more likely than when inflation was still 7 percent.”
The job market has been flexible.
Another reason for optimism is the gradual cooling of the labor market from a near-boom to a boom.
The rapid reopening of the economy in 2021 has created a huge imbalance between supply and demand: There were suddenly hundreds of thousands of jobs to fill in restaurants, hotels, airlines and other businesses, and not enough people to fill them. For workers, it was a rare moment of leverage, resulting in the fastest wage growth in decades. But economists worry that those rapid gains could make it difficult to get inflation under control.
However, the frenzy has subsided in recent months. Employers are not posting the same number of job opportunities. Employees are not moving easily from one job to another in search of higher salary. Also, millions of workers have joined or rejoined the workforce, helping ease the labor shortage.
However, so far this relaxation has been done without a significant increase in unemployment. The unemployment rate is roughly where it was before the pandemic in a strong labor market. Some industries, such as technology and finance, have laid off workers, but most of those workers have found other jobs relatively quickly.
“The labor market warming is subsiding substantially, to a level where it is no longer of concern,” said Jan Hatzius, chief economist at Goldman Sachs.
Mr. Hatzius, who has long been more optimistic about the prospects for a soft landing than many of his peers on Wall Street, on Monday cut his forecast for a recession to 20 percent from 25 percent. He said recent progress in inflation and the labor market, as well as in consumer spending and other areas, suggests that the economy is slowly moving on from the disruptions of the past few years.
“We are seeing the other side of the pandemic,” he said. “The pandemic has caused huge upheaval in economies, and now I think it is fading away, and that is the main theme for me.”
The risk remains.
Still, many economists are less optimistic. Inflation, at least excluding volatile food and energy prices, remains well above the Fed’s 2 percent annual target, at 4.8 percent in June. And although progress on inflation so far has been relatively painless, there’s no guarantee that it will continue—employers who initially responded to higher interest rates by hiring fewer workers soon began cutting jobs. can do.
Johns Hopkins economist Lawrence M. Ball wrote an article last year, “I think it’s premature for people to be declaring a soft landing on a victory lap.” impressive paper concluding that it would be difficult for the Fed to get inflation back to 2 percent without a significant increase in unemployment.
Part of the problem is that the Fed has very little room for error. Act too aggressively to control inflation, and the central bank could push the economy into recession. Do too little, and inflation could rise again – policymakers will be forced to step back.
Neil Dutta, head of economic research at Renaissance Macro, says he worries that the strong labor market will trigger a new upswing in the economy, triggering a resumption of rapid price rises – an “inflationary jump” that could negate recent progress. reverses.
“Over the next three to six months, the inflation dynamics will look pretty cool – it will feel like a soft landing,” he said. “The question is, what comes after that?”
Then there are also factors beyond the control of policy makers. Oil prices, which soared last year when Russia invaded Ukraine, could do so again. Food prices could start rising again – a prospect made more real this week after Russia scrapped a deal to allow Ukraine to export grain over the Black Sea.
With the economy already slowing, even relatively small developments – such as the resumption of student loan payments, which will especially strain the finances of many young adults – could be enough to impede the recovery. , said chief economist Jay Bryson. Wells Fargo.
“Student loan debt by itself is not enough to cause a recession, but if you have a recession, it can be a kind of death by a thousand paper cuts,” he said.
Mr Bryson still expects the recession to start this year. But he has become less convinced in recent months. He recently asked about 20 people on his team to write down how likely they think a recession is next year. Answers ranged from 30 percent to 65 percent, with an average of 50 percent—the coin toss’s chances for a soft landing, which many once thought impossible.
“Put the champagne on ice,” said Mr. Bryson. “Hopefully early next year we can start popping it out.”
