The warnings have been sounded for more than a year: A recession is going to hit the United States. If not this quarter, then by next quarter. Or the quarter after that. Or maybe next year.
So is a recession still in sight?
The latest signs suggest maybe not. Despite much higher borrowing costs, thanks to the Federal Reserve’s aggressive streak of interest rate hikes, consumers keep spending, and employers keep hiring. Gas prices have dropped, and grocery prices have leveled off, giving Americans more spending power.
The economy keeps managing to grow. And so does the belief among some economists that the United States might actually achieve an elusive “soft landing,” in which growth slows but households and businesses spend enough to avoid a full-blown recession.
“The U.S. economy is genuinely displaying signs of resilience,” said Gregory Daco, chief economist at EY, a tax and consulting firm. “This is leading many to rightly question whether the long-forecast recession is really inevitable or whether a soft-landing of the economy" is possible.
Analysts point to two trends that may help stave off an economic contraction. Some say the economy is experiencing a “rolling recession,” in which only some industries shrink while the overall economy remains above water.
Others think the U.S. is experiencing what they call a “richcession”: Major job cuts, they note, have been concentrated in higher-paying industries like technology and finance, heavy with professional workers who generally have the financial cushions to withstand layoffs. Job cuts in those fields, as a result, are less likely to sink the overall economy.
Still, threats loom: The Fed is all but certain to keep raising rates, at least once more, and to keep them high for months, thereby continuing to impose heavy borrowing costs on consumers and businesses. That's why some economists caution that a full-blown recession may still occur.
“The Fed will keep pushing until it fixes the inflation issue," said Yelena Shulyatyeva, an economist at BNP Paribas.
Here's how it could all play out:
IT’S A ROLLING RECESSION
When different sectors of the economy take their turns contracting, with some declining while others keep expanding, it’s sometimes called a “rolling recession.” The economy as a whole manages to avoid a full-fledged recession.
The housing industry was the first to suffer a tailspin after the Fed began sending interest rates sharply higher 15 months ago. As mortgage rates nearly doubled, home sales plunged. They're now 20 per cent lower than they were a year ago. Manufacturing soon followed. And while it hasn’t fared as badly as housing, factory production is down 0.3 per cent from a year earlier.
And this spring, the technology industry suffered a slump, too. In the aftermath of the pandemic, Americans were spending less time online and instead resumed shopping at physical stores and going to restaurants more frequently. That trend forced sharp job cuts among tech companies such as Facebook’s parent Meta, video conferencing provider Zoom and Google.
At the same time, consumers ramped up their spending on travel and at entertainment venues, buoying the economy's vast service sector and offsetting the difficulties in other sectors. Economists say they expect such spending to slow later this year as the savings that many households had amassed during the pandemic continue to shrink.
Yet by then, housing may have rebounded enough to pick up the baton and drive economic growth. There are already signs that the industry is starting to recover: Sales of new homes jumped 12 per cent from April to May despite high mortgage rates and home prices far above pre-pandemic levels.
And other sectors should continue to expand, providing a foundation for overall growth. Krishna Guha, an analyst at Evercore ISI, notes that some areas of the economy — from education to government to health care — are not so sensitive to higher interest rates, which is why they are still hiring and probably will keep doing so.
If the U.S. economy achieves a soft landing, Guha said, “we think these rolling sectoral recessions will be a big part of the story."
IT’S A ‘RICHCESSION’
Affluent Americans aren’t exactly suffering, particularly as the stock market has rebounded this year. Yet it's also true that the bulk of high-profile job losses that began last year have been concentrated in higher-paying professions. That pattern is different from what typically happens in recessions: Lower-paying jobs, in areas like restaurants and retail, are usually the first to be lost and often in depressingly large numbers.
That's because in most downturns, as Americans start to pull back on spending, restaurants, hotels and retailers lay off waves of workers. As fewer people buy homes, many construction workers are thrown out of work. Sales of high-priced manufactured goods, such as cars and appliances, tend to fall, leading to job losses at factories.
This time, so far, it hasn’t happened that way. Restaurants, bars and hotels are still hiring — in fact, they have been a major driver of job gains. And to the surprise of labor market experts, construction companies are also still adding workers despite higher borrowing rates, which often discourage residential and commercial building.
Instead, layoffs have been striking mainly white collar and professional occupations. Uber Technologies said last week that it will cut 200 of its recruiters. Earlier this month, GrubHub announced 400 layoffs among the delivery company's corporate jobs. Financial and media companies are also struggling, with Citibank announcing this month that it will have shed 1,600 workers in the April-June quarter.
Many of the affected employees are well-educated and likely to find new jobs relatively quickly, economists say, helping keep unemployment down despite the layoffs. Right now, for example, the federal government, as well as employers in the hotel, retail and even railroad industries are seeking to hire people who have been laid off from the tech giants.
Tom Barkin, president of the Federal Reserve Bank of Richmond, notes that affluent workers typically have savings they can draw upon after losing a job, enabling them to keep spending and fueling the economy. For that reason, Barkin suggested, white collar job losses don't tend to weaken consumer spending as much as losses experienced by blue collar workers do.
“It’s easy to imagine that this might be a different sort of softening labor market ... that has a different kind of impact, both on demand and on things like the unemployment rate than your normal weakening,” Barkin said in an interview with The Associated Press last month.
OR MAYBE NO RECESSION
The most optimistic economists say they're growing more hopeful that a recession can be avoided, even if the Fed keeps interest rates at a peak for months to come.
They point out that a range of recent economic data has come in better than expected. Most notably, hiring has stayed surprisingly resilient, with employers adding a robust average of roughly 300,000 jobs over the past six months and the unemployment rate, at 3.7 per cent, still near a half-century low.
Manufacturing, too, has defied gloomy expectations. On Tuesday, the government reported that companies last month stepped up their orders of industrial machinery, railcars, computers and other long-lasting goods.
Many analysts have been encouraged because some threats to the economy haven’t turned out to be as damaging as feared — or haven't surfaced at all. The fight in Congress, for example, over the government’s borrowing limit, which could have triggered a default on Treasury securities, was resolved without much disruption in financial markets or discernible impact on the economy.
And so far, the banking turmoil that occurred last spring after the collapse of Silicon Valley Bank has largely been contained and doesn’t appear to be weakening the economy.
Jan Hatzius, chief economist at Goldman Sachs, said this month that the ebbing of such threats led him to mark down the likelihood of a recession within the next 12 months from 35 per cent to just 25 per cent.
Other economists point out that the economy doesn’t face the types of dangerous imbalances or events that have ignited some recent recessions, such as the stock market bubble in 2001 or the housing bubble in 2008.
“The risk of recession is receding, rapidly,” said Neil Dutta, an economist at Renaissance Macro. Whether we are having a rolling recession or “richcession,” he said, “If you have to call it different names, it’s not a recession.”
