Main menu


Can the US avoid a recession? As inflation eases, optimism soars

featured image

WASHINGTON (AP) – For months, the outlook for the U.S. economy has been grim: Inflation has hit a four-decade high.weakening consumer spending, rising interest rates. Most economists predicted a recession for 2023.

An economic downturn is still possible. However, in recent weeks, with inflation showing widespread signs of easing, a more optimistic view has gained traction: perhaps a recession is not inevitable after all.

One reason for the tentative optimism is evidence that an acceleration in US wages, which has benefited workers but also increased inflation, is slowing.. Federal Reserve Chairman Jerome Powell often points out to the rapid increase in workers’ wages to explain why the Fed had to raise interest rates so aggressively. Fed rate hikes, if taken seriously and long enough, could weaken the economy to the point of triggering a recession.

On Thursday, the government is expected to issue another subdued inflation report, which would raise hopes that the Fed will decide to halt its rate hikes sooner than expected. Meanwhile, the job market – the most important pillar of the economy – remains remarkably strong.

These trends are raising expectations that the Fed might manage to engineer an often elusive “soft landing”. in which the economy slows but does not reverse, and the unemployment rate rises slightly but remains low. It would still mean painful times for many people. But it would not inflict the widespread unemployment that usually results from a recession.

“All signs point to a greater, not a lesser, likelihood of a soft landing,” said Alan Blinder, an economist at Princeton University and a former vice chairman of the Fed. “It still might not be more than 50-50. But 50-50 looks better than it did a few months ago.

The most positive sign, Blinder said, is the continued deceleration in inflation. Dropped from a peak of 9.1% in June to a still-high 7.1% in November. When the government releases its December inflation report on Thursday, economists predict it will show another drop, to 6.5%. On a monthly basis, prices are expected to have remained stable from November to December – another encouraging sign.

The slowdown in inflation stems from a number of factors, including cheaper gasthe unraveling of supply chain tangles and lower profit margins among many retailers.

The national average price of a gallon of gasoline was $3.27 on Wednesday, well below a peak of $5 in mid-June. Average used car prices, which skyrocketed 37% in 2021, have fallen for five straight months. They are now 3% cheaper than they were a year ago. Clothing prices have fallen in two of the last three months. Furniture prices have fallen for three straight months.

Meanwhile, consumers are spending less, forcing many retailers to cut prices to reduce their merchandise inventories. Online prices have fallen for four consecutive months from year-ago levels, according to Adobe Analytics, especially for computers, toys and sporting goods.

“The sooner the inflation rate comes down,” said Blinder, “the sooner the Fed will ease and therefore the less chance of a recession.”

That said, there are many threats to a soft landing. As China’s economy reopens from its COVID-19 lockdowns, it could start to absorb more of the world’s oil supply. This could cause US gas prices to rise again.

And while layoffs remain historically low outside tech companies, that trend could be reversed if companies become worried about the economic outlook again. Congress could also fight to raise the debt ceiling by this summer.which could cause economic turmoil or a deep recession if they don’t.

But for now, a soft landing scenario is starting to play out. The slowdown in price increases suggests that the Fed’s seven rate hikes over the past year have had some effect, although with inflation still well above its 2% target, policymakers have made it clear that they expect to raise their benchmark rate by at least three-quarters of a point over.

Even as the central bank raised its benchmark rate at the fastest pace in four decades, the economy continued to grow and companies continued to hire. In December, employers added a solid 223,000 jobsand the unemployment rate dropped to 3.5%, hitting a 53-year low.

“The labor market data is very supportive of the idea that the economy can … slow down without a recession,” said Mark Zandi, chief economist at Moody’s Analytics.

There are signs of progress in the three areas that Powell identified as the main drivers of inflation: cars, furniture and other physical goods; housing and rents; and travel, medical care, restaurant dining and other services.

Commodity prices dropped as shipping issues during the pandemic unfolded. And while rent and housing costs still contribute to inflation, there’s also good news: Private measures show that rents for new apartments are rising much more slowly. This slowdown should fuel official rent measures as early as this summer.

Powell focused in particular on the threat of inflation from accelerating wages. Restaurants, retailers, hotels and doctors’ offices have had to raise wages substantially to attract and retain workers.

But even there, some signs indicate that inflation may continue to fall. The December jobs report showed wages rose 4.6% from a year earlier, slower than a peak of 5.6% last spring. The Fed hopes to slow the pace of wage increases to be consistent with lower inflation. Softer inflation could help stretch paychecks further.

A salary tracker compiled by job listings website Indeed is also showing a slowdown: Salaries advertised in job advertisements fell in December for the ninth straight month.

The wage slowdown was even more pronounced in many service sectors. Average hourly wages for workers in the leisure and hospitality sector, which includes restaurants, hotels and entertainment companies, grew a healthy 6.4% last year. However, that’s only about half of its growth rate in 2021. The median wage for retail workers has also dropped.

“We are well past the peak of monthly pay increases,” said Claudia Sahm, a former Fed economist and founder of Sahm Consulting.

Sahm also noted that rising wages don’t always translate into higher prices. While many companies pass the cost of higher wages on to customers by charging more, they can also make their employees more efficient or find other savings to offset higher wages.

Even if modest hiring continues, that doesn’t mean wages will continue to rise as fast as before.

Ron Hetrick, senior economist at Lightcast, a data analytics firm, noted that strong wage gains often come after a shock hits the job market. One example was the rapid reopening of the economy that followed the outbreak of the pandemic in early 2020. Millions of employers tried to hire employees at the same time.

After that period, Hetrick said, companies can adjust. Even if unemployment remains low, employers don’t have to pay perpetually higher wages to fill vacancies. They might try to automate some jobs, for example. This is what many companies in Japan, where unemployment has been low for years, have been doing.

“You see some signs that there is a little less frenzy to hire,” Hetrick said.

The number of temporary workers has fallen for five consecutive months. And the average length of the workweek fell in December. Both signs indicate that companies are less desperate for labor.

The fact that many employers have shortened workweeks rather than cutting jobs also suggests that they are keen to retain their employees even as the economy slows. With so many companies struggling to hire workers over the last couple of years, companies are now more reluctant to lay off workers.

“That’s how you get a smooth landing,” said Hetrick. “Asking workers not to produce so much. But that doesn’t mean you get rid of them.”