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Washington: The warnings sounded more than a year ago: a recession The United States will strike. If not this quarter, then by the next. or a quarter after that. Or maybe next year.
So, is a recession still on the horizon?
The latest signs suggest that maybe not. Even though borrowing costs have risen, thanks to a series of interest rate hikes by the Federal Reserve, consumers continue to spend, and employers continue to hire. Gas prices have fallen, and grocery prices have stabilized, giving Americans more purchasing power.
The economy continues to grow. So does the belief among some economists that the United States may indeed achieve an elusive “soft landing,” in which growth slows while households and firms spend enough to avoid a full-blown recession.
“the American economy “This leads many to rightly question whether a long-anticipated recession is really inevitable or whether a soft landing for the economy is possible,” said Gregory Daco, chief economist at EY, a tax and advisory firm.
Analysts point to two trends that may help avert deflation. Some say the economy is in a “rolling recession,” with only some industries contracting while the overall economy remains above water.
Others believe that the US is experiencing what they call a “rich class”: They note that the main job cuts have been concentrated in higher-paying industries like technology and finance, which are burdened with professional workers who generally have the financial cushions to afford layoffs. As a result, job cuts in those areas are less likely to flood the overall economy.
However, threats loom: The Fed will almost certainly continue to raise interest rates, at least once more, and keep them high for several months, thus continuing to impose exorbitant borrowing costs on consumers and businesses. This is why some economists warn of the possibility of a full recession.
“The Fed will keep pressing until it fixes the inflation problem,” said Yelena Shulyateva, an economist at BNP Paribas.
On Wednesday, Fed Chair Jerome Powell reinforced that message, saying that the central bank’s key interest rate has not been constraining the economy “for very long” and that “the bottom line is that policy has not been constraining enough for long enough.”
Powell spoke at a global conference in Sintra, Portugal, along with three other central bank leaders whose economies are also struggling as inflation continues to rise. Last week, the Bank of England raised its main interest rate by half a point, which could push the UK into recession, while the European economy has stagnated for the past six months.
Here’s how it all might happen in the US:
It’s a rolling recession
When different sectors of the economy take turns contracting, with some declining while others continuing to expand, it is sometimes called a “rolling recession.” The economy as a whole managed to avoid a complete recession.
The housing industry was the first to suffer a sharp decline after the Federal Reserve began sharply raising interest rates 15 months ago. With mortgage rates nearly doubling, home sales have plummeted. They are now 20% lower than they were a year ago. Industrialization soon followed. And while it didn’t fare as badly as housing, factory production fell 0.3% from a year earlier.
And this spring, the tech industry also suffered a recession. In the aftermath of the pandemic, Americans have been spending less time online and instead have resumed shopping in physical stores and going to restaurants more frequently. The trend has led to sharp job cuts among technology companies such as Facebook parent Meta, video conferencing provider Zoom and Google.
At the same time, consumers have stepped up their spending on travel and entertainment venues, supporting the broad service sector in the economy and offsetting difficulties in other sectors. Economists say they expect that spending to slow later this year as the savings that many families amassed during the pandemic continue to shrink.
However, by then, the housing sector may have rebounded enough to take charge and drive economic growth. There are already signs that the industry is beginning to recover: New home sales jumped 12% from April to May despite rising mortgage rates and home prices well above pre-pandemic levels.
Other sectors should continue to expand, providing a basis for inclusive growth. Krishna Guha, an analyst at Evercore ISI, notes that some areas of the economy — from education to government to healthcare — aren’t very sensitive to higher interest rates, which is why they’re still hiring and probably will continue to do so.
If the US economy achieves a soft landing, Guha said, “we think these rolling sectoral downturns will be a big part of the story.”
It’s a “rich profession”
Wealthy Americans aren’t exactly suffering, especially with the stock market rebounding this year. However, it is also true that the bulk of the high-profile job losses starting last year were concentrated in high-paying occupations. This pattern is different from what usually happens in recessions: Low-paying jobs, in areas like restaurants and retail, are usually the first to be lost and often in disheartening large numbers.
This is because in most downturns, when Americans begin to cut back on spending, restaurants, hotels, and retailers lay off waves of workers. With fewer people buying homes, many construction workers are being put out of work. Sales of high-priced manufactured goods, such as cars and appliances, tend to decline, leading to job losses in factories.
This time, until now, it didn’t happen that way. Restaurants, bars, and hotels are still hiring — in fact, they’ve been the main driver of job gains. To the surprise of labor market experts, construction companies are still adding workers despite high borrowing rates, which often discourage residential and commercial construction.
Instead, layoffs hit mainly white-collar and professional occupations. Uber Technologies said last week that it would cut 200 of its recruiters. Earlier this month, GrubHub announced that it would lay off 400 employees among the delivery company’s jobs. Financial and media companies are also struggling, with Citibank announcing it will lay off 1,600 workers in the April-June quarter. On Tuesday, Ford Motor Co. said it would lay off several hundred engineers, after it cut 3,000 white-collar jobs last year.
Economists say many of the affected employees are well educated and likely to find new jobs relatively quickly, helping to keep unemployment low despite the layoffs. Right now, for example, the federal government, as well as employers in the hotel, retail, and even railroad industries, are scrambling to hire the tech giants’ layoffs.
Tom Parkin, president of the Federal Reserve Bank of Richmond, points out that wealthy workers usually have savings they can tap into after a job loss, which enables them to continue spending and fuel the economy. For this reason, Parkin suggested, the loss of white-collar jobs does not dampen consumer spending as much as the losses to blue-collar workers do.
Barkin said in an interview with The Associated Press last month.
Or there may be no recession
More optimistic economists say they are growing hopeful that a recession can be avoided, even if the Federal Reserve keeps interest rates at a peak for months to come.
They noted that a batch of recent economic data came in better than expected. In particular, hiring remained surprisingly resilient, with employers adding a solid average of nearly 300,000 jobs over the past six months and the unemployment rate, at 3.7%, still near its lowest level in half a century.
Manufacturing, too, is defying bleak expectations. On Tuesday, the government reported that companies last month ramped up orders for industrial machinery, railway cars, computers and other long-lived goods.
Many analysts have been encouraged that some of the threats to the economy have not turned out to be as harmful as feared – or did not appear at all. Conflict in Congress, for example, over a government borrowing limit, which would have resulted in a default on Treasury securities, was resolved without much disruption to the financial markets or noticeable impact on the economy.
So far, the banking turmoil that occurred last spring after the collapse of the Silicon Valley bank has been largely contained and does not appear to dampen the economy.
Jan Hatzius, chief economist at Goldman Sachs, said this month that the waning of such threats prompted him to reduce the probability of a recession in the next 12 months from 35% to just 25%.
Other economists point out that the economy is not experiencing the kinds of imbalances or catastrophic events that sparked some recent recessions, such as the stock market bubble of 2001 or the housing bubble of 2008.
“Recession risks are receding quickly,” said Neil Dutta, economist at Renaissance Macro. Whether we’re having a rolling recession or a “rich recession,” he said, “if you have to call it by different names, it’s not a recession.”
So, is a recession still on the horizon?
The latest signs suggest that maybe not. Even though borrowing costs have risen, thanks to a series of interest rate hikes by the Federal Reserve, consumers continue to spend, and employers continue to hire. Gas prices have fallen, and grocery prices have stabilized, giving Americans more purchasing power.
The economy continues to grow. So does the belief among some economists that the United States may indeed achieve an elusive “soft landing,” in which growth slows while households and firms spend enough to avoid a full-blown recession.
“the American economy “This leads many to rightly question whether a long-anticipated recession is really inevitable or whether a soft landing for the economy is possible,” said Gregory Daco, chief economist at EY, a tax and advisory firm.
Analysts point to two trends that may help avert deflation. Some say the economy is in a “rolling recession,” with only some industries contracting while the overall economy remains above water.
Others believe that the US is experiencing what they call a “rich class”: They note that the main job cuts have been concentrated in higher-paying industries like technology and finance, which are burdened with professional workers who generally have the financial cushions to afford layoffs. As a result, job cuts in those areas are less likely to flood the overall economy.
However, threats loom: The Fed will almost certainly continue to raise interest rates, at least once more, and keep them high for several months, thus continuing to impose exorbitant borrowing costs on consumers and businesses. This is why some economists warn of the possibility of a full recession.
“The Fed will keep pressing until it fixes the inflation problem,” said Yelena Shulyateva, an economist at BNP Paribas.
On Wednesday, Fed Chair Jerome Powell reinforced that message, saying that the central bank’s key interest rate has not been constraining the economy “for very long” and that “the bottom line is that policy has not been constraining enough for long enough.”
Powell spoke at a global conference in Sintra, Portugal, along with three other central bank leaders whose economies are also struggling as inflation continues to rise. Last week, the Bank of England raised its main interest rate by half a point, which could push the UK into recession, while the European economy has stagnated for the past six months.
Here’s how it all might happen in the US:
It’s a rolling recession
When different sectors of the economy take turns contracting, with some declining while others continuing to expand, it is sometimes called a “rolling recession.” The economy as a whole managed to avoid a complete recession.
The housing industry was the first to suffer a sharp decline after the Federal Reserve began sharply raising interest rates 15 months ago. With mortgage rates nearly doubling, home sales have plummeted. They are now 20% lower than they were a year ago. Industrialization soon followed. And while it didn’t fare as badly as housing, factory production fell 0.3% from a year earlier.
And this spring, the tech industry also suffered a recession. In the aftermath of the pandemic, Americans have been spending less time online and instead have resumed shopping in physical stores and going to restaurants more frequently. The trend has led to sharp job cuts among technology companies such as Facebook parent Meta, video conferencing provider Zoom and Google.
At the same time, consumers have stepped up their spending on travel and entertainment venues, supporting the broad service sector in the economy and offsetting difficulties in other sectors. Economists say they expect that spending to slow later this year as the savings that many families amassed during the pandemic continue to shrink.
However, by then, the housing sector may have rebounded enough to take charge and drive economic growth. There are already signs that the industry is beginning to recover: New home sales jumped 12% from April to May despite rising mortgage rates and home prices well above pre-pandemic levels.
Other sectors should continue to expand, providing a basis for inclusive growth. Krishna Guha, an analyst at Evercore ISI, notes that some areas of the economy — from education to government to healthcare — aren’t very sensitive to higher interest rates, which is why they’re still hiring and probably will continue to do so.
If the US economy achieves a soft landing, Guha said, “we think these rolling sectoral downturns will be a big part of the story.”
It’s a “rich profession”
Wealthy Americans aren’t exactly suffering, especially with the stock market rebounding this year. However, it is also true that the bulk of the high-profile job losses starting last year were concentrated in high-paying occupations. This pattern is different from what usually happens in recessions: Low-paying jobs, in areas like restaurants and retail, are usually the first to be lost and often in disheartening large numbers.
This is because in most downturns, when Americans begin to cut back on spending, restaurants, hotels, and retailers lay off waves of workers. With fewer people buying homes, many construction workers are being put out of work. Sales of high-priced manufactured goods, such as cars and appliances, tend to decline, leading to job losses in factories.
This time, until now, it didn’t happen that way. Restaurants, bars, and hotels are still hiring — in fact, they’ve been the main driver of job gains. To the surprise of labor market experts, construction companies are still adding workers despite high borrowing rates, which often discourage residential and commercial construction.
Instead, layoffs hit mainly white-collar and professional occupations. Uber Technologies said last week that it would cut 200 of its recruiters. Earlier this month, GrubHub announced that it would lay off 400 employees among the delivery company’s jobs. Financial and media companies are also struggling, with Citibank announcing it will lay off 1,600 workers in the April-June quarter. On Tuesday, Ford Motor Co. said it would lay off several hundred engineers, after it cut 3,000 white-collar jobs last year.
Economists say many of the affected employees are well educated and likely to find new jobs relatively quickly, helping to keep unemployment low despite the layoffs. Right now, for example, the federal government, as well as employers in the hotel, retail, and even railroad industries, are scrambling to hire the tech giants’ layoffs.
Tom Parkin, president of the Federal Reserve Bank of Richmond, points out that wealthy workers usually have savings they can tap into after a job loss, which enables them to continue spending and fuel the economy. For this reason, Parkin suggested, the loss of white-collar jobs does not dampen consumer spending as much as the losses to blue-collar workers do.
Barkin said in an interview with The Associated Press last month.
Or there may be no recession
More optimistic economists say they are growing hopeful that a recession can be avoided, even if the Federal Reserve keeps interest rates at a peak for months to come.
They noted that a batch of recent economic data came in better than expected. In particular, hiring remained surprisingly resilient, with employers adding a solid average of nearly 300,000 jobs over the past six months and the unemployment rate, at 3.7%, still near its lowest level in half a century.
Manufacturing, too, is defying bleak expectations. On Tuesday, the government reported that companies last month ramped up orders for industrial machinery, railway cars, computers and other long-lived goods.
Many analysts have been encouraged that some of the threats to the economy have not turned out to be as harmful as feared – or did not appear at all. Conflict in Congress, for example, over a government borrowing limit, which would have resulted in a default on Treasury securities, was resolved without much disruption to the financial markets or noticeable impact on the economy.
So far, the banking turmoil that occurred last spring after the collapse of the Silicon Valley bank has been largely contained and does not appear to dampen the economy.
Jan Hatzius, chief economist at Goldman Sachs, said this month that the waning of such threats prompted him to reduce the probability of a recession in the next 12 months from 35% to just 25%.
Other economists point out that the economy is not experiencing the kinds of imbalances or catastrophic events that sparked some recent recessions, such as the stock market bubble of 2001 or the housing bubble of 2008.
“Recession risks are receding quickly,” said Neil Dutta, economist at Renaissance Macro. Whether we’re having a rolling recession or a “rich recession,” he said, “if you have to call it by different names, it’s not a recession.”
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