Almost everyone expects a recession. Could the economy avoid one?
As the Fed wrestles with inflation, experts wonder if people think the U.S. economy is worse than it really is
“People and businesses create their own self-fulfilling prophecy: you expect the worst, you end up creating the worst,” Shamie said. “I laugh because sometimes I sit with some of my friends, talking about how bad it is. And I say, ‘We’re at a gorgeous restaurant, spending tons of money.’ I look left and right, and say, ‘Ah, things don’t look so bad. And yet, you’re complaining.’ ”
That same divide pervades the whole economy, as people brace for a looming downturn — but aren’t yet feeling one in their daily lives. The overwhelming view among economists and Fed watchers is that the country is barreling toward a recession. And experts have good reason for the doom and gloom: The Fed is in the middle of an all-out effort to bring down dangerously high inflation, hiking interest rates at the most aggressive pace in decades. On Wednesday, Federal Reserve Chair Jerome H. Powell will speak at the Brookings Institution, where he’s expected to set the stage for smaller rate hikes in the coming weeks and months while reinforcing the Fed’s commitment to taming inflation.
Yet the feared recession still hasn’t arrived. Ever since the Fed started aggressively hiking interest rates in March, crucial pillars of the economy have stayed remarkably strong. The economy grew in the third quarter after shrinking in the first half of the year. Gas prices are ticking down. Companies are still eager to hire workers. And for many businesses and households planning for the future, a slowdown just doesn’t seem imminent.
Powell and his colleagues say they will be guided by the economic data, and this week will offer plenty to analyze. New government figures on October job openings come out on Wednesday, and the November jobs report comes out on Friday. But for months, the Fed’s resounding message has made clear that officials will not stop until prices come back down to normal levels, and as a result, the chances of avoiding a recession are slimming.
“With baseline growth that’s only modest growth over this year and next, negative shocks to the global economy, or to our economy, clearly could tip us into a recession,” New York Fed President John Williams told reporters on Monday. “I hope that’s not the case. But that’s clearly a risk out there given all the uncertainty in the global economic outlook.”
For now, though, observers see more and more reason to hope that a painful recession may not come.
Last week, the Organization for Economic Cooperation and Development, an international group, said the global economy should avoid a recession next year, though European economies will still slow significantly as Russia’s invasion of Ukraine continues to send energy prices spiking.
Earlier this month, Goldman Sachs’ chief economist put the odds of a U.S. recession in the next year at 35 percent — far below other forecasts so far. The thinking is that growth will slow but remain positive; the labor market could avoid massive layoffs; wage growth could simmer down; and inflation could be on a path to more normal levels.
“We still see a very plausible, non-recessionary, four-step path from the high-inflation economy of the present to a low-inflation economy of the future,” Goldman’s Jan Hatzius wrote in an analyst note.
The labor market and consumer spending have yet to crater despite the Fed’s rate hikes. Employers added 261,000 jobs in October, edging down after growing like gangbusters in the first half of the year, but still showing overall strength. Employers remain desperate to hire: the number of job openings rose in September compared with the month before, to 10.7 million.
Consumer spending — which usually makes up 70 percent of economic activity — is also robust as the holiday season gets underway. Retail sales rose sharply in October, according to the Commerce Department. Shoppers are paying higher prices for basics like gas and food. But they also continue to spend on items like cars, furniture and dining out. Consumer sentiment has also improved since plummeting over the summer, when gas prices topped $5 per gallon. Prices at the pump have steadily ticked down, and on Monday, the national average was $3.54 per gallon, according to AAA — down more than 10 cents per gallon from the week before, but still higher than this time last year, before the Ukraine war.
Corporate earnings calls have also gotten more upbeat. According to research by FactSet published Nov. 18, the number of S&P 500 companies citing the term “recession” on earnings calls in the third quarter dropped by 26 percent compared with the second quarter.
Of course, not all parts of the economy have been spared, and the full weight of rate hikes here and abroad won’t be felt until next year. But the housing market was quick to respond. Buyer demand has slowed significantly as mortgage rates soar, helping prices fall as “For Sale” signs linger. Silicon Valley, too, has been hit by waves of layoffs and hiring freezes, including at big names like Meta and Amazon (whose founder, Jeff Bezos, owns The Washington Post).
No one doubts the pain high inflation has inflicted on people’s own budgets, and the disproportionate consequences felt by lower-income households. More people are turning to retirement savings for cash, according to new research by Vanguard. Fiona Greig, Vanguard’s global head of investor research and policy, wrote last week that a recent rise in households drawing down on their employer-sponsored retirement accounts “could be a sign of some deterioration in the financial health of the U.S. consumer.”
Yet some economists and policymakers say there’s a divide between how badly people perceive the economy to be and how they respond. Curtis Dubay, chief economist at the U.S. Chamber of Commerce, pointed to a paradox dubbed “secondhand pessimism,” where people sour on the economy but don’t change their own behavior.
“Businesses and consumers feel the economy is slowing, or is not in good shape, but their actions don’t follow with that,” Dubay said. “Consumers continue to spend … On the business side, they say, ‘The economy is bad, and it’s going to get worse, but our specific situation is good.’ ”
Inflation may well explain this gap. High prices, and the central bank’s fight to tame them, bring an inescapable amount of uncertainty for families and the broader economy, said Mary Daly, president of the San Francisco Fed.
Daly said that as she travels around her district — which spans nine western states and is the Fed system’s largest district both by geography and by the size of its economy — she hears that “people’s own situations feel different than the situations they fear are out there, or that they even see out there.” A business may have found creative ways to make its margins, for example, but knows others that can’t.
“[Inflation] creates this sense of anxiety that the economy can just tip over at any point in time, because anyone knows it’s unsustainable,” Daly told reporters last week. “As the Fed acts to bring it down, that creates uncertainty.”
“We’re in a high-uncertainty time, which is going to add to that sense of foreboding,” Daly added.
Americans feel the anxiety. A closely watched survey of consumers released by the University of Michigan this month said that along with the ongoing impact of inflation, consumers’ attitudes have been “weighed down by rising borrowing costs, declining asset values, and weakening labor market expectations.”
For now, Shamie, of Delta Children, is staying optimistic. He knows the economy could turn quickly. Parents may have to rethink a new play set if inflation continues to climb, or if the economy slows abruptly. But so far, he’s sticking to his plans.
“There are real problems, existing problems, obviously,” Shamie said. “But I think people tend to pull back — fire people, lay off people, cut expenses. And then everything cycles back to their business because the whole economy ends up shaking.”
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