The U.S. economy is down, but it’s far from out.
The most recent evidence suggests the U.S. is not on the verge of its second recession in three years, but rather the economy is growing at a steady if somewhat slower pace. Consumers are still spending, and businesses are still hiring and investing.
Start with the number of people applying for unemployment benefits. That fell in mid-August with layoffs remaining near a record low. A big reason companies aren’t laying off a lot of workers — many, in fact, are still hiring — is that profit margins are quite high.
A survey of manufacturers in the Philadelphia region, meanwhile, also rebounded this month after a bout of weakness in July. It’s another good omen.
That’s not all. Retail sales were stronger than expected in July, industrial production snapped back, and the U.S. added a surprisingly strong 528,000 jobs over the course of the month.
The hiring surge was a big eye-opener.
“There was a general sense that things were slowing down until the July jobs report,” said Morning Consult chief economist John Leer.
To top it off, tumbling gas prices have offered pessimistic Americans some relief from high inflation and given them renewed confidence in the economy. The cost of living was actually unchanged in July — the lowest reading in two years.
“These numbers are not consistent with the idea that the U.S. economy is in or is near recession,” said Pantheon Macroeconomics chief economist Ian Shepherdson.
Thomas Barkin, president of the Richmond Federal Reserve, agreed. He said in a speech on Friday that the recent string of economic reports has been “strong.”
Fading recession worries
It’s a big change from less than a month ago, when recession talk dominated Wall Street after a second straight drop in gross domestic product. An old but informal rule of thumbs suggests two quarters of negative GDP is a sign of an economy in recession.
The following run of positive economic reports tells a different story — one that has been reflected by a rally this month in stocks and a decline in long-term interest rates.
The Dow Jones Industrial Average
jumped to as high as 34,152 this week from 30,630 a month earlier — an 11.5% gain — before retreating in the past two days. And the yield on the 10-year Treasury note
has fallen to 2.99% from 3.48% in mid-June.
Economists say the market reaction reveals fresh hopes among investors that the Federal Reserve can engineer a so-called soft landing — slowing the economy just enough to bring down high inflation without causing a recession.
Call it a Goldilocks scenario, if you will: an economy that is neither too hot nor too cold, but just right.
In any case, the early signs point to an increase in GDP in the third quarter.
IHS Markit, one of Wall Street’s premier forecasters, projects a 0.5% annual rate of growth in the July-to-September period — an estimate that is likely to rise.
The only reason the number isn’t even stronger is the drop in home sales due to higher interest rates. The housing market is perhaps the only part of the U.S. economy that is performing poorly now.
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Not only that, but second-quarter GDP probably wasn’t as bad it looked. IHS predicts the government’s next update will show the economy shrank just 0.2% in the spring instead of the 0.9% originally reported.
Not out of the woods
So everything is hunky-dory with the economy, right? Not by a longshot.
The Federal Reserve is on track to sharply raise interest rates in the next year to try to tamp down the highest inflation in more than four decades.
Higher rates slow the economy by raising borrowing costs and causing businesses and consumers to spend less. The effect has already been quite evident in a housing market that went from red-hot to ice-cold almost overnight.
The strong labor market has been a bulwark against recession so far, but paradoxically it could cause the Fed to take more dramatic measures to depress economic growth.
Fed officials view the strong jobs report for July and the tightest labor market in decades as evidence they need to raise rates even higher.
Another worry is economic malaise in China and narrowing odds of recession in Europe. Troubles overseas could dampen American exports and deliver a jolt to the U.S. economy. “The global outlook is what really scares me,” Leer said.
Even Fed officials, who are normally loath to sound negative, won’t rule out the possibility of a recession. Many economists think the U.S. is headed for one by next year.
“So the question right now is, can we bring inflation down without triggering a recession?” Minneapolis Fed President Neel Kaskari said Thursday. “And my answer to that question is: I don’t know.”