The small group of economists who’ve been maintaining that the US can avoid a recession, despite the most aggressive Federal Reserve tightening in decades, is starting to breathe easier.
Many of their peers had expected surging interest rates— up 5 percentage points in just over a year—would’ve put a more material dent in hiring and personal consumption by now. Instead, the unemployment rate is hovering at a more-than-five-decade low, consumers are still spending, and the housing market is beginning to stabilize.
At the same time, inflation has slowed appreciably. That combination is reviving hopes among the true believers, including Fed Chair Jerome Powell, for a “soft landing” scenario in which price pressures dissipate without massive job losses or an economic downturn.
It’s still an out-of-consensus call. Of the 27 forecasters surveyed by Bloomberg in early May, only five said they didn’t expect the US economy to slip into a recession some time over the next year. Still, the starting point keeps getting pushed back, as a robust labor market keeps wage growth elevated and excess savings accumulated during the pandemic continue to boost the spending power of American households.
“We all hate that term, ‘This time is different,’ but we have not seen this dynamic before,” says Ellen Zentner, chief US economist for Morgan Stanley. “This is unique.”
Zentner, one of the few optimists on Wall Street, is quick to point out the headwinds facing an economy she describes as “flying dangerously low to the ground.” The failure of several regional lenders that buckled under the weight of soaring interest rates continues to reverberate, and data revisions—especially to jobs numbers—could yet change the outlook.
That’s similar to the message Powell offered reporters earlier this month, after the central bank raised its benchmark rate above 5% for the first time since 2007. “It’s possible that this time is really different,” he said. But he also said, “There are no promises in this.”
Lately, the data support the optimists.
Hiring picked up in April, pushing the unemployment rate down to 3.4%. Labor force participation, too, has been rising—especially among the cohort age 25 to 54 that economists like to refer to as “prime working age.” It hit a 15-year high last month, alleviating some of the supply-side constraints that have been plaguing the labor market, while a falling number of job openings points to a gradual cooling in demand for workers.
Moreover, auto sales surged in April to the highest level in almost two years, suggesting consumers are still more than willing to buy big-ticket items as supply-chain issues ease. Retail sales more broadly posted gains last month, and factory production picked up.
And on the inflation front, services prices excluding energy and housing rose in April at the slowest pace in nine months. Given that Fed officials have been particularly worried about pressures in that part of the economy, the moderation in that metric reduces the chances of additional rate hikes.
David Mericle, the chief US economist at Goldman Sachs Group Inc., is another among the few who’ve stuck to a no-recession call. It’s been a lonely ride, but it’s starting pay off, he says.
“We did a lot of good research and came up with a lot of non-obvious things that people missed that informed that view,” Mericle says. “We were on the optimistic end of this debate, and in some respects things have gone even better than I would have dreamed.”
The vast majority of forecasters still see a recession as highly likely. But the recent run of good data is causing some to rethink the timing.
Wells Fargo & Co. economists said last week that they now expect the recession to start in the fourth quarter of this year, instead of the third quarter. Jean-François Perrault, Scotiabank’s chief economist, says that while his team expects the economy to fall into recession in the current quarter, they “may be pushing that out” to the third quarter in the next forecast. Kathy Bostjancic at Nationwide, who sees a recession beginning in the third quarter, says continued resilience in the labor market could delay the start to later in the year.
“The consensus forecast for at least a year running has been that we’re three months away from a recession, and it just keeps getting pushed back and pushed back and pushed back,” says Stephen Stanley, the chief US economist at Santander US Capital Markets LLC. “A big part of the reason is that consumer spending continues to grow.”
While a tight labor market remains a key support to spending, momentum is beginning to cool. And household balance sheets—while still padded by savings accumulated in the early part of the pandemic—are starting to show early signs of strain. This could make next year more “touch and go,” Stanley says, as the full weight of the Fed’s tightening hits the economy.
He and Sarah House, a senior economist at Wells Fargo, also warned about the flip side of resilient consumer spending: It might keep inflation too high for the Fed’s liking. “Ultimately, we’ll need to see a pullback in demand to get inflation under control, making a recession still seem fairly inevitable,” House says.
A third view is that the economy is experiencing a “rolling recession,” a term Ed Yardeni says he first used in the 1980s when Texas was hit hard by an oil slump but the rest of the country held up. It’s a similar picture today with pockets of pain—merchandise trade has been under pressure, and commercial real estate is teetering—but aggregate growth figures are unlikely to show a technical recession, according to Yardeni, president of Yardeni Research Inc.
“That’s the story so far, and that’s my ongoing forecast,” he says.
While the final judgment on the post-pandemic business cycle may not be written for years to come, views will probably continue to morph as new data accumulate and expectations change.
“The recession narrative has been a somewhat inconsistent one over time,” says Goldman’s Mericle. “I think we are on to Version 3 at this point.”
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