The US economy is evolving. So why are economists worried about a recession?

The rapid rebound in consumer spending has overwhelmed supply chains, leading to rising prices. (Gabi Jones / The New York Times)

Employers add hundreds of thousands of jobs a month and would hire even more people if they could find them. Consumers are spending, businesses are investing, and wages are growing at the fastest pace in decades.

Therefore, naturally, economists warn of a possible recession.

Rapid inflation, rising oil prices and global instability have forced forecasters to drastically lower their estimates of economic growth this year and increase the likelihood of direct cuts. Investors share this concern: the bond market last week erupted with a warning signal that often, though not always, predicted a downturn.

Sign up for The Morning newsletter from the New York Times

Such forecasts may seem confusing when the economy is, by many measures, booming. The United States has recovered more than 90% of jobs lost in the first weeks of the pandemic, and employers continue to hire at a frantic pace, adding 431,000 jobs in March alone. Unemployment fell to 3.6%, just above the level before the pandemic, which itself was the lowest for half a century.

But for soothsayers, the extraordinary power of recovery carries the seeds of its own destruction. Demand – for cars, for houses, for food in restaurants and for the workers who provide them – exceeded supply, which led to the fastest inflation in 40 years. Politicians in the Federal Reserve argue that they can cool the economy and reduce inflation without raising unemployment or causing a recession. But many economists are skeptical that the Fed could create such a “soft landing,” especially at a time of such extreme global uncertainty.

“It’s like trying to land during an earthquake,” said Tara Sinclair, a professor of economics at George Washington University.

William Dudley, a former president of the Federal Reserve Bank of New York, called the recession “virtually inevitable.” He is one of the economists who argues that if the Fed had started raising interest rates last year, it could have curbed inflation by simply pushing the brakes on the economy. Now, they say, the economy is growing so fast – and prices are rising so fast – that the only way for the Fed to gain control is to put the brakes on and cause a recession.

However, most forecasters say a recession remains unlikely next year. High oil prices, rising interest rates and declining state aid will drive growth this year, said Aneta Markowska, chief economist at Jefferies Investment Bank. But corporate profits are high, households have trillions of savings, and the debt burden is low – all of which should serve as a cushion against any slowdown.

“It’s easy to build a very negative narrative, but if you look at the magnitude of all these impacts, I don’t think they’re significant enough to push us into a recession in the next 12 months,” she said. A recession, almost by definition, involves job losses and unemployment; right now companies are doing almost everything possible to retain workers.

“I just don’t see what would force companies to make a full 180 and move from ‘We need to hire all these people and we can’t find them’ to ‘We have to fire people,'” Markovska said.

However, economists are known to poorly predict a recession. It therefore makes sense to focus on where the recovery is happening right now, and on the forces that threaten to derail it.

Growth will slow. This is not necessarily a bad thing.

Last year was the best for economic growth since the mid-1980s and the best for job growth of all time. These types of explosive profits – thanks to vaccines and fueled by trillions of dollars in state aid – are unlikely to happen again this year.

In fact, some slowdown is probably desirable. The rapid rebound in consumer spending, especially on cars, furniture and other goods, overcrowded the supply chain, leading to rising prices. Demand for workers is so high that jobs remain unfilled despite wage growth. Jerome Powell, chairman of the Fed, recently said that the labor market has become “clamped to an unhealthy level.”

Some economists, especially the left, have embraced this claim, arguing that a hot labor market is good for workers. But even most said the recent job growth rate has been volatile for a long time.

“We are back to normal at a very rapid pace, and it would be unrealistic to think that this could continue,” said Josh Beowens, director of research at the Institute for Economic Policy, a progressive think tank. According to him, even the slow growth of wages does not bother him until the increase in wages lags behind inflation.

But some economists have warned against slowing growth at a rare time when low-paid workers have seen significant wage increases and unemployment has fallen for vulnerable groups. Unemployment among black Americans fell to 6.2% in March, but is still nearly twice as high as that of white Americans.

“From my point of view recovery is pretty reliable, and why not enjoy it right now?” said Michelle Holder, president of the Washington Center for Fair Growth, a progressive think tank. She said that while economists were right, concerned about high inflation, “I don’t think such voices were so out of place regarding high unemployment.”

The slowdown should not mean a recession. (In theory.)

The key question for politicians is whether they will be able to cool the economy without freezing it. Powell claims they can, though he admits it will be difficult.

His argument goes something like this: there are 11 million job openings and less than 6 million unemployed. Potential home buyers are more than homes that can be bought, and more potential car buyers than affordable cars. Gradually raising interest rates and making loans more expensive, the Fed hopes to curb demand for workers, homes and cars, but not so much that employers are starting to cut jobs.

This is a difficult balance sheet, and historically the Fed has often failed to achieve it. But unlike the last recession, when an extremely slow recovery seemed to be under constant threat of cessation, the current rebound is fast enough that it could lose significant momentum without going back. Employers could cut hiring plans, for example, and still have a job for just about anyone who wanted it.

Some economists also continue to hope that supply constraints will ease as the pandemic recedes, allowing inflation to cool without having to do the same to reduce Fed demand. There are some signs of this: more than 400,000 people rejoined the workforce in March as a reduction in coronavirus cases and a more robust school schedule allowed more people to return to work.

Aaron Sojorner, an economist at the University of Minnesota, said politicians should not think of the economy as “overheating” as much as “fever”, its capabilities are limited by the pandemic.

“If you have a fever, you can’t perform at the level you can perform if you’re healthy and you sweat, even if you do less than before,” he said. According to him, improving the public health crisis should allow the fever to disappear.

A lot can go wrong.

For most of last year, Fed officials shared Sojorner’s view, seeing inflation as a result of pandemic disruptions that are rapidly dissipating. When these disruptions proved more persistent than expected, politicians changed course, but too late to prevent accelerating inflation beyond what they had anticipated.

The problem is that central bankers need to make decisions before all the data is available.

It is possible, for example, that the imbalances that led to rapid inflation are beginning to dissipate largely on their own. The federal aid programs created at the start of the pandemic were largely over, and many families dropped their savings. This can reduce demand when supply starts to catch up. In this scenario, the Fed may close the recovery if it acts too aggressively.

But it is also possible that strong job growth and wage growth will sustain high consumer demand, while supply chain disruptions and labor shortages will remain. In this case, if the Fed is too cautious, it risks getting out of control of inflation. The last time this happened, the Fed led by Paul Walker had to cause a severe downturn in the early 1980s to bring inflation to a head.

Powell argued that it was not too late to prevent such a “hard landing.” But even if a recession is imminent, it is unlikely to happen right away.

“I don’t think we’re going to go into recession in the next 12 months,” said Megan Green, a senior fellow at Harvard Kennedy School and chief economist at the Kroll Institute. “I think it’s possible 12 months after that.”

The hustle and bustle of the world is making it more and more difficult.

When this year began, forecasters tied February or March as the time when major inflation indices peak and begin to fall. But the war in Ukraine and the resulting jump in oil prices have shattered those hopes. Compared to the same period last year, inflation reached a 40-year high in February and almost certainly accelerated even more in March, when gas prices in most parts of the country exceeded $ 4 per gallon.

The pandemic itself also remains a wild card. In recent weeks, China has imposed harsh closures in parts of the country to stop the spread of coronavirus cases there, and a new sub-option has led to an increase in cases in Europe. This could prolong supply chain disruptions around the world, even if the United States itself avoids another wave of coronavirus.

“The biggest uncertainty is global supply chains and how we manage them all, because it depends on China’s COVID policy and the war in Europe,” Green said.

There are no indications that rising gas prices, stock market volatility or fear of COVID-19 have weakened consumers ’willingness to spend or businesses’ willingness to hire. But these factors increase uncertainty, making it difficult for politicians to understand where the economy is heading and decide how to respond.

© 2022 The New York Times Company

Leave a Comment