By Jeffry Bartash
Recession worries are easing – for now – as inflation slows and the economy strengthens
Due to rising interest rates, the US should now be in or near a recession. Instead, a resilient economy is attempting to create the third straight two-fer in 2023.
That means 2% growth in gross domestic product, the economy’s official scorecard.
Nearly halfway through the third quarter, GDP is on track to grow 2.4% to 4.1% annually, according to two of the most closely watched forecasters.
The Atlanta Federal Reserves Nowcast puts growth at 4.1%. S&P Global, arguably the gold standard on Wall Street, is estimating a 2.4% gain.
The estimate is likely to shrink to closer to 2% by the end of the quarter in September, but even then it would be a notable achievement. Higher borrowing costs historically weaken the economy, often leading to a recession within a year or two.
For almost a year and a half, the Federal Reserve has been raising short-term interest rates in the US from almost zero to a peak of 5.5% in the fight against high inflation.
Still, the economy grew at a solid annual pace of 2% in the first quarter and even faster at 2.4% in the second quarter. The surprising rate of growth this year is slightly above what analysts are calling the highest sustained pace for the economy.
It shouldn’t have happened. Senior Fed officials predicted the economy would slow in 2023, while economists put the chance of a recession at 50% or more.
Of course, the economy did not get off scot-free.
Rising interest rates have depressed the housing market, weakened manufacturing industries, constrained business investment and forced banks to cut lending. The economy has been damaged.
But the bedrock of the economy – consumer spending – has remained fairly stable. Americans buy comparatively fewer goods, such as home appliances, but spend heavily on services such as travel, leisure, and food.
Some economists are calling it a post-pandemic waste of things people couldn’t do until the coronavirus took its course. However, the greatest support will probably have to benefit a dynamic labor market.
Most Americans looking for a job are able to find one, keeping the unemployment rate near a half-century low of 3.6%. Businesses are still hiring despite recession concerns and reluctant to lay off workers in the face of the worst labor shortages in modern times.
Just look at initial jobless claims, an indicator of layoffs. They fell sharply over the past month, returning near post-pandemic lows after a surge in early summer.
“With initial and standing jobless claims also declining, the economy appears to be stabilizing after a shaky patch that began in mid-2022,” said Bill Adams, Comerica’s chief economist.
The tight labor market, on the other hand, has pushed wages up faster than they have in years. Not enough to fully offset a price increase due to high inflation, but enough to limit the damage.
The result: consumers are confident enough to keep spending — and keep the economy growing. In addition, consumer confidence surveys have improved significantly in recent months after falling to new lows earlier in the year.
Confidence, both large and small, has also partially recovered from recent lows, on the back of resilient consumer demand and strong earnings.
“Corporate earnings reports to date suggest that companies continue to hold up reasonably well,” said Stephen Stanley, chief economist at Santander Capital Markets.
There are other tailwinds too.
Government spending is well above pre-pandemic levels, including green energy-related subsidies for manufacturers and higher Social Security benefits due to inflation.
Even with bonds, savings accounts and the like, savers finally get a decent return.
Can the economy maintain momentum in the final months of 2023?
It will depend on whether labor cost increases are moderated and inflation continues to decelerate towards the Fed’s 2% target. Inflation is now between 3% and 4.8%, depending on the unit of measurement.
Easing price pressures would allow the Fed to end its current rate-hike cycle and give the economy more room to maneuver, while higher rates would do the opposite.
Some economists and Fed officials even believe such a scenario could result in a fabled soft landing, with the Fed beating inflation without triggering a recession. That has only happened once or twice since World War II.
“There is still a plausible story that inflation will normalize in a short period of time and the economy will avoid further trauma,” said Thomas Barkin, president of the Richmond Fed.
That’s not something centrist Barkin was expecting a year earlier when he pointed out in another speech that eight of the Fed’s previous tightening cycles had ended in recession.
-Jeffry Bartash
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(ENDS) Dow Jones Newswires
12/23/08 1525ET
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