Key economic indicators such as huge retail sales and historic job gains paint a picture of a resilient economy showing few signs of slowing down.
But a smaller-than-expected drop in inflation in January has some economists worried the Federal Reserve will extend its rate hikes, which could plunge the economy into a recession that will put millions of people out of work.
The consumer price index (CPI), a key indicator of inflation, has fallen for seven straight months, falling to 6.4 percent annually in January from a peak of 9.1 percent last June.
Markets had expected the CPI to land at 6.2 percent, spurring a chorus of economists wanting the Fed to speed up its rate hikes.
While the Fed says it’s aiming for a “soft landing,” meaning lower inflation without a serious recession, it currently expects its rate hikes to lift the jobless rate by 1.2 percentage points, according to December forecasts, likely representing a loss of at least 1 million would mean jobs.
Here’s a look at how the economy is battling a recession amid a grueling battle with stubborn inflation.
Americans haven’t stopped spending despite higher prices
Retail sales rose 3 percent in January, the largest monthly gain in nearly two years, according to Commerce Department data released on Wednesday.
The rise, which is being fueled by increases in auto sales and spending at restaurants and department stores, shows that US consumers are getting by even as inflation and higher borrowing costs weigh on their purchasing power.
This is another indicator that the US economy is not in recession and may even be picking up steam. Analysts predicted retail sales would rise just 1.8 percent after falling 1.1 percent in December.
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“If you look at consumers, they’re still spending,” Bank of America CEO Brian Moynihan said at an investment conference Tuesday.
But the data is certainly worrying Fed officials, who want consumers to spend less so companies are forced to cut prices.
“Although resilient consumer spending is a positive sign of the health of the economy, renewed demand for supply-constrained categories could add to inflationary pressures and potentially prompt more aggressive action from the Fed,” Kayla Bruun, economic analyst at Morning Consult, wrote in a research note on Wednesday.
The country has the strongest job market in half a century
The US economy added 517,000 jobs in January, beating expectations and bringing the unemployment rate down to 3.4 percent, the lowest since 1969.
Wage increases can have a large impact on the prices companies charge, so higher unemployment is generally associated with lower costs for consumers.
The decline in inflation amid low unemployment has prompted economists to figure out which parts of the economy are preventing prices from falling faster.
An increasingly cited area is the core non-residential services category, which includes labor-intensive businesses such as nail salons, restaurants and barber shops.
Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, described this sector as “very labor market-bound,” and the White House recently analyzed it with new, specially calibrated payroll statistics.
The White House analysis found that despite persistent inflation in the sector, wages have fallen rapidly, suggesting that wages are not the main driver of inflation.
“I’ve been a server for many years…and servers don’t make that much,” Kianna Quann, manager of City Cafe Diner in Chattanooga, Tenn., told The Hill in a phone interview. “The best I know is that a server makes $2.13 [an hour]because they depend on tips.”
Quann said that despite the lower net pay she sees at her workplace, server jobs are still in high demand and people want to work.
“We’re currently getting a lot of applications, and they’re all of different ages. Not just young people, everyone I guess. People are going back to work, and the most attractive job is one where you can take cash home every day. So people tend towards server jobs.”
Strong earnings and GDP signal a growing economy
Companies have posted record profits as they recover from the coronavirus pandemic, another sign the US economy is not on the verge of a recession.
According to federal data, pre-pandemic corporate earnings generally stayed between $1.6 trillion and $2 trillion a year, excluding inventory and capital consumption.
But since the pandemic, earnings have soared to over $2.8 trillion and even surpassed $3 trillion in the second quarter of 2022. Inflation-adjusted earnings as a share of the economy’s value added have risen from about 12 cents on the dollar before the pandemic to 17 cents in the third quarter of 2022.
Gross domestic product (GDP) grew by 3.2 percent in the third quarter of last year and by 2.9 percent in the fourth quarter.
Here’s who is losing out in the country’s booming economy
Not all Americans share the prosperity of the new post-pandemic era of higher earnings.
Kimberly Martin, a Newark, NJ resident who had to move into a homeless shelter after losing her job, told The Hill she thinks the commercial real estate sector is crowding out opportunities to build homes for people who actually need them need.
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“Every time they build a home, it’s a luxury two or three bedroom home [apartment building]and there are people who have been in shelters for years,” she said.
“I know men who work but still have to look for a pension. Why can’t you dedicate a building exclusively to studios, only studios?” said Martin. “Just something we can afford”
High inflation could still force the Fed to act
Prices are falling, but not fast enough to relieve working-class families or please the Fed.
Core prices, which exclude food and energy prices and are closely monitored by the Fed, rose 0.4 percent in January, flat from December and up from November. The increase was driven by higher housing costs, with rents rising 0.8 percent in January.
The Fed, keen to prevent high prices from becoming the new normal, has said it is ready to raise rates high enough to trigger an economic downturn or even a full-blown recession.
Financial markets are forecasting that the Fed will make two more rate hikes of 0.25 percentage points during its next two policy meetings, small steps meant to slowly cool the economy.
But several Fed officials said this week tighter action may be warranted, even if it increases the risk of a recession later in the year.
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Dallas Fed President Lorie Logan said Tuesday that the central bank “must remain prepared to continue raising interest rates for a longer period of time than previously anticipated.”
Some economists remain hopeful that a “soft landing” is still possible, noting that government rent data is typically delayed by several months and private sector data shows rents are falling.
“It could be the story of two halves of inflation this year. Stronger-than-expected inflation in the first half and a more pronounced slowdown in the second half,” said Ryan Sweet, chief economist at Oxford Economics in the US.
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