The U.S. economy should have been on the brink of recession by now. it’s not.
why not? Simply put, consumers are continuing to spend, supported by rising wages and solid job security. Companies hate to fire workers who are difficult to hire in the first place.
Although the economy has slowed since last year, it is still growing at a pace that suggests a recession is not imminent.
Gross domestic product (GDP), the official measure of the U.S. economy, is expected to grow at an annual pace of 1-2% in the second quarter ending Friday.
Not only that, but the US economy probably grew faster in the first three months of the year than previously reported. maybe even faster.
First-quarter GDP growth is likely to be revised up to 2% from the government’s latest forecast of 1.3%. The latest figures are due to be released on Thursday.
How does it stack up historically? From 2010 to her 2019, the US grew at an average annual rate of about 2.3%. So the economy is currently expanding just below trend.
“Perhaps, perhaps, against all expectations, the U.S. economy may emerge from the inevitable and long-anticipated recession,” said Gregory Daco, chief economist at EY-Parthenon.
What was thought to have caused the recession by now was the sharp rise in interest rates since the spring of 2022. Rising borrowing costs typically make consumer and business spending and investment more expensive, putting pressure on the economy.
In less than a year and a half, the Fed raised its main short-term interest rate from near zero to its cap of 5.25%. It also suggests that the Fed may raise rates a few more times as part of a sustained effort to curb high inflation.
Rising interest rates have hit homes and manufacturing industries hard. Aggressive action by the Fed has dampened home sales and dwindled sales of high-priced industrial goods.
Surprisingly, however, the housing market appears to have hit bottom and may even be on the rise. Production seems to be stabilizing.
Meanwhile, consumers largely ignore rising interest rates. They still spend a lot of money on services, especially eating out, travel and recreation. They are buying even more new cars, a clear sign of optimism.
“Consumer spending remains resilient,” said Richmond Fed President Tom Barkin. “Even though I’m weaker, I still think I’m not weak.”
The home is also about to receive a new boost.
The Fed’s fight against inflation is showing steady progress. Inflation, measured by the consumer price index, slowed to 4% last year from a 40-year high of 9.1%.
As a result, wages for workers are rising faster than inflation for the first time since March 2021. Combined with lower oil prices, consumers will have a little more leeway to spend.
The rise in wages is due to a very tight labor market. With the unemployment rate at 3.7%, the lowest level in nearly half a century, workers have the greatest influence over their employers in decades.
And even if a recession does occur, it is not very likely that labor shortages will ease any time soon.
U.S. population growth has slowed, immigration has declined since the pandemic, and workers aged 25 to 54 already make up a significant portion of the workforce.
Against this backdrop, the Fed has raised its own GDP forecast for 2023 from 0.4% to 1.1%. The central bank expects the economy to expand at a similar pace in 2024 and accelerate in 2025.
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But investors and economists have yet to back it up.
read: Recession fears intensify, MarketWatch weekly figures show
If the Fed continues to raise rates, they say, it should give them something. And it usually does. Since World War II, almost every Fed rate hike cycle has been followed by a recession.
Gus Faucher, chief economist at PNC Financial Services, said the recession “is likely to start in late 2023 or early 2024 as the effects of rising interest rates continue to affect the economy as a whole.”