The United States has been facing predictions of an impending recession for over a year now. However, recent indicators are suggesting that this may not be the case.
Despite the Federal Reserve’s continuous increase in interest rates leading to higher borrowing costs, consumers are still spending and employers are still actively hiring. In addition, the drop in gas prices and stabilization of grocery prices have given Americans more disposable income to spend.
The economy continues to show signs of growth, giving rise to the belief among certain economists that the United States may finally achieve a sought-after “soft landing,” whereby growth slows down but consumer and business spending remains strong enough to prevent a full-blown recession.
Gregory Daco, the chief economist at EY, a tax and consulting firm, stated, “The U.S. economy is demonstrating genuine signs of resilience.” This has led many to question whether the previously predicted recession is truly unavoidable or if a soft landing for the economy is actually possible.
Analysts have identified two trends that could help prevent an economic contraction. Some argue that the economy is going through a “rolling recession,” wherein only specific industries experience a decline while the overall economy remains afloat.
Some argue that the U.S. is currently experiencing a “richcession,” with job cuts primarily affecting higher-paying industries such as technology and finance.
These industries are predominantly staffed by professional workers who typically have financial stability and can withstand layoffs. Consequently, job cuts in these sectors are less likely to have a significant impact on the overall economy.
However, there are still potential risks on the horizon. The Federal Reserve is expected to continue raising interest rates, potentially causing borrowing costs to remain high for consumers and businesses. This ongoing imposition of high borrowing costs could potentially lead to a full-blown recession, according to some economists.
Yelena Shulyatyeva, an economist at BNP Paribas, believes that the Federal Reserve will continue to raise interest rates until the issue of inflation is resolved.
Forecast for the United States economy:
Despite concerns over a possible recession, Federal Reserve Chair Jerome Powell reiterated that the central bank’s current interest rate policy has not been restrictive enough to significantly hinder economic growth.
Powell’s remarks were made alongside other central bank leaders at a global conference in Sintra, Portugal, where the attendees discussed the challenges of tackling high inflation.
While the Bank of England recently raised its key interest rate, which has the potential to trigger a recession in the United Kingdom, the U.S. economy remains resilient. Over the past six months, the European economy has shown signs of stagnation.
Overall, the situation in the United States suggests that a recession is not imminent, but economic conditions should still be closely monitored.
IT’S A ROLLING RECESSION
The phenomenon of certain sectors experiencing contraction while others continue to expand, preventing a complete economic downturn, is commonly referred to as a “rolling recession.” This is apparent in the current economic climate.
The housing industry was the first to be impacted when the Federal Reserve significantly raised interest rates about 15 months ago. This led to a substantial increase in mortgage rates, causing a sharp decline in home sales.
Presently, home sales have plummeted by 20% compared to a year ago. As the housing market began to decline, the manufacturing sector also took a hit, although not as severe as housing. Factory production has declined by 0.3% compared to the previous year.
Amidst the current economic climate, a “rolling recession” has become evident, wherein certain sectors endure contraction while others continue to expand, preventing a comprehensive economic downturn.
The housing industry was notably the first to bear the impact of the Federal Reserve’s significant interest rate increases approximately 15 months ago.
Consequently, there was a considerable surge in mortgage rates, leading to a sharp decrease in home sales. Presently, home sales have experienced a substantial decline of 20% in comparison to the same period last year. Following the downturn in the housing market, the manufacturing sector also experienced a setback, although not as severe as the housing industry.
Factory production has dipped by 0.3% in contrast to the previous year.
Additionally, other sectors of the economy are expected to continue expanding, providing a solid foundation for overall growth.
Analyst Krishna Guha from Evercore ISI highlights that certain areas of the economy, such as education, government, and healthcare, are not as sensitive to higher interest rates. Therefore, they have continued hiring and are likely to maintain this trend.
If the U.S. economy successfully achieves a soft landing, Guha suggests that these rolling sectoral recessions will play a significant role in shaping the economic narrative.
IT’S A ‘RICHCESSION’
Interestingly, despite the ongoing economic challenges, affluent Americans have not been significantly impacted, especially with the stock market rebounding this year.
However, it is worth noting that the majority of high-profile job losses observed since last year have been concentrated in higher-paying professions.
This differs from the usual pattern seen in recessions, where lower-paying jobs in sectors like restaurants and retail are typically the first to be lost, often in large numbers.
Typically, when Americans start reducing their spending during downturns, industries like restaurants, hotels, and retail tend to lay off large numbers of workers.
Construction workers are also affected due to reduced demand for homes. The decline in sales of high-priced manufactured goods such as cars and appliances can lead to job losses in factories.
Surprisingly, the current situation has deviated from this norm. Restaurants, bars, and hotels are still actively hiring and have played a significant role in job gains.
Additionally, contrary to expectations, construction companies continue to add workers despite higher borrowing rates, which usually discourage residential and commercial building activities.
The layoffs that have occurred during the current economic downturn have primarily affected white-collar and professional occupations. For instance, Uber Technologies recently announced the reduction of 200 recruiters, while GrubHub disclosed 400 layoffs in corporate positions within their delivery company.
Financial and media firms have also faced challenges, including Citibank’s announcement of shedding 1,600 jobs in the second quarter of the year. Ford Motor Co. has also implemented layoffs, cutting several hundred engineers after eliminating 3,000 white-collar positions in the previous year.
Economists suggest that many of the affected employees are highly educated and likely to secure new jobs relatively swiftly. This factor helps to keep unemployment rates comparatively low despite the layoffs.
In fact, various sectors, such as the federal government, hotel industry, retail, and even railroads, are actively seeking to hire individuals who have been laid off by large tech companies.
Tom Barkin, president of the Federal Reserve Bank of Richmond, explains that affluent workers often have savings they can rely on after losing their jobs. This enables them to continue spending, thereby supporting the economy.
Hence, job losses in white-collar occupations generally do not have as significant of an impact on consumer spending compared to layoffs experienced by blue-collar workers.
Tom Barkin, president of the Federal Reserve Bank of Richmond, suggests that the current softening labor market may have a distinct impact on both demand and the unemployment rate, different from the typical weakening observed during economic downturns.
In an interview with The Associated Press last month, Barkin expressed the idea that this labor market contraction could potentially be unique and have varying effects compared to what is traditionally observed.
OR MAYBE NO RECESSION
The most optimistic economists express increasing hope that a recession can be avoided, even if the Federal Reserve maintains high interest rates for the foreseeable future. Their optimism is supported by recent economic data that has exceeded expectations.
Notably, hiring has remained resilient, with employers adding an average of approximately 300,000 jobs over the past six months. The unemployment rate, currently at 3.7%, remains near a historic low.
Manufacturing has also shown strength, contrary to pessimistic forecasts. Recent government data reveals an increase in orders for industrial machinery, railcars, computers, and other long-lasting goods.
Analysts find encouragement in the fact that certain potential threats to the economy have not materialized or have had less severe impacts than anticipated.
For instance, the congressional debate on the government’s borrowing limit, which had the potential to trigger a default on Treasury securities, was resolved without significant disruption in financial markets or discernible effects on the economy.
Furthermore, the banking turmoil that occurred last spring following the collapse of Silicon Valley Bank has been mostly contained and does not appear to be weakening the overall economy.
Jan Hatzius, chief economist at Goldman Sachs, recently revised down the probability of a recession within the next 12 months from 35% to just 25%, attributing this shift to the waning of such threats.
Other economists emphasize that the current economy does not confront the types of dangerous imbalances or events that triggered recent recessions, such as the stock market bubble in 2001 or the housing bubble in 2008.
Neil Dutta, an economist at Renaissance Macro, asserts that the risk of a recession is rapidly receding. He suggests that the need to give it different names like “rolling recession” or “richcession” indicates that it may not even qualify as a recession.