The U.S. economy was supposed to be teetering on the verge of recession by now. It’s not.
Why not? The short answer: Consumers keep spending, helped by rising wages and rock-solid job security. Businesses are loath to lay off workers who have been hard to hire in the first place.
Even though the economy has slowed since last year, it’s still growing at a pace that suggests a recession is not imminent.
Gross domestic product, the official scorecard for the U.S. economy, is forecast to increase at an annual pace of 1% to 2% in the second quarter, which ends on Friday.
“ ‘Maybe, just maybe, and against all odds, the U.S. economy might escape the inevitable and long-forecast recession.’”
Not only that, but the U.S. economy probably grew faster in the first three months of the year than previously reported. Perhaps even a lot faster.
GDP in the first quarter is likely to be revised to show growth of as much as 2%, compared with the most recent government estimate of 1.3%. The updated figures will be released Thursday.
How does that stack up historically? From 2010 until 2019, the U.S. averaged about 2.3% growth per year. So the economy is expanding now just below trend.
“Maybe, just maybe, and against all odds, the U.S. economy might escape the inevitable and long-forecast recession,” said chief economist Gregory Daco of EY Parthenon.
What was supposed to have brought a recession about by now is the rapid increase in interest rates since spring 2022. Higher borrowing costs usually depress the economy by making it more expensive for consumers and businesses to spend and invest.
The Federal Reserve has jacked up a key short-term rate to a top end of 5.25% from near zero in less than a year and a half. And it’s signaled it may raise rates a few more times as part of a sustained effort to tame high inflation.
Higher rates have done some damage, mostly notably to housing and manufacturing. Home sales slumped after the Fed took aggressive action, and sales of big-ticket manufactured goods also tapered off.
In something of surprise, though, the housing market appears to have bottomed out and might even be on the upswing. Manufacturing seems to have stabilized as well.
Consumers, for their part, have largely shrugged off higher interest rates. They are still spending lots of money, especially on services such as dining out, travel and recreation. They are even buying more new cars, a clear sign of optimism.
“Consumer spending remains resilient,” said Richmond Federal Reserve President Tom Barkin. “Think of it as weaker but not yet weak.”
Households are about to get another boost, too.
The Fed’s fight against inflation is showing steady progress. The rate of inflation, based on the consumer-price index, has slowed to 4% from a 40-year high of 9.1% last year.
As a result, worker pay is rising faster than inflation for the first time since March 2021. Along with lower oil prices, that will give consumers a bit more leeway to spend.
The increase in wages stems from a very tight labor market. The unemployment rate stands near a half-century low at 3.7%, giving employees the most leverage over employers in decades.
And there is not much likelihood of the labor shortage easing anytime soon, even if there is a recession.
The U.S. population is growing more slowly, immigration has waned since the pandemic and the share of workers age 25 to 54 in the workplace is already quite high.
Against the current backdrop, the Fed raised its own GDP forecast for 2023 to 1.1%, from a prior 0.4%. The central bank sees the economy expanding at a similar pace in 2024 and then accelerating in 2025.
Many Wall Street DJIA, investors and economists are still not buying it, however.
Read: Recession concerns gaining steam, MarketWatch weekly gauge shows
If the Fed keeps raising rates, they point out, something has to give. And it usually does: Almost every cycle of Fed rate hikes since World War II has been followed by a downturn.
Chief economist Gus Faucher of PNC Financial services said a recession is likely “to start in late 2023 or early 2024, as the impact of higher interest rates continues to work its way through the economy.”
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June 27, 2023 at 12:33AM
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The economy was supposed to cave in by now. It hasn’t — and GDP is set to rise again. - MarketWatch
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