Can the US avoid recession? As inflation declines, so does optimism

WASHINGTON (AP) – For months, the outlook for the U.S. economy has been largely bleak: Inflation has hit a four-decade highweakening consumer spending, interest rates rise. Most economists see a recession by 2023.

An economic downturn is still possible. However, with inflation showing widespread signs of easing in recent weeks, a more cheerful idea has come into focus: Maybe a recession isn’t inevitable.

One reason for the initial optimism is evidence that the acceleration of U.S. wages, which has benefited workers but also pushed up inflation, is slowing.. Federal Reserve Chairman Jerome Powell often points out to rapidly rising worker wages to explain why the Fed had to raise interest rates so aggressively. Fed rate hikes, if carried out far enough and long enough, can weaken the economy enough to trigger a recession.

The government is expected to release a softer inflation report on Thursday, fueling hopes that the Fed may decide to end rate hikes sooner than expected. Meanwhile, the most important pillar of the economy, the labor market, remains remarkably robust.

These trends raise expectations that the Fed could prepare an often elusive “soft landing.” thus the economy slows but does not reverse and the unemployment rate rises slightly but remains low. This would still mean painful times for many people. But it will not cause the widespread unemployment that usually results from a recession.

“All indications are that the probability of a soft landing is higher, not lower,” said Princeton University economist Alan Blinder, who previously served as the Fed’s vice chairman. “It may not be more than 50-50 yet. But 50-50 looks better than it did a few months ago.”

According to Blinder, the most positive sign is the continued slowdown in inflation. It fell from a peak of 9.1% in June 7.1%, still high in November. When the government publishes its December inflation report on Thursday, economists forecast a further drop to 6.5%. On a monthly basis, prices are expected to remain stable from November to December, which is another encouraging sign.

The slowdown in inflation is caused by a number of factors, including cheap gasunraveling the grunts of the supply chain and smaller profit margins among many retailers.

The national average price of a gallon of gas was $3.27 on Wednesday, down from more than $5 in mid-June. Average used car prices, which rose 37% in 2021, have fallen for five consecutive months. Now they are 3% cheaper than a year ago. Clothing prices have decreased in two of the last three months. Furniture prices have fallen for three months.

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

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

All that said, there are plenty of threats to a soft landing. As China’s economy reopens from the COVID-19 lockdowns, it may begin absorbing more of the world’s oil supply. This could push up gas prices in the US again.

While layoffs remain historically low outside of tech companies, the trend could reverse if businesses again worry about the economic outlook. Congress may also struggle to raise the debt ceiling by this summerit could lead to economic turmoil or, if they fail, a deep recession.

But for now, a soft landing scenario is starting to play out. The slowdown in price increases suggests the Fed’s 7 percent hike last year has had some effect, although inflation is still well above its 2 percent target, with officials saying they expect to raise the key rate by at least three quarters of a month. record more.

Even as the central bank raised its benchmark rate at the fastest pace in four decades, the economy continued to grow and businesses continued to hire. Employers added 223,000 jobs in Decemberand the unemployment rate fell to 3.5%, a 53-year low.

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

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

Commodity prices have fallen as shipping snarls have died down during the pandemic. While rent and housing costs still contribute to inflation, there’s good news there, too: Private measures show that rents for new apartment rentals are now rising more slowly. This slowdown should be fueled by official hiring measures like this summer.

Powell particularly focused on the threat of inflation caused by the acceleration of wages. Restaurants, retailers, hotels and doctor’s offices have had to raise wages significantly to attract and retain workers.

However, some signs suggest that inflation may continue to decline. The December jobs report showed wages rose 4.6% from a year ago, slower than the 5.6% peak last spring. The Fed hopes to slow the pace of wage increases so that they are in line with low inflation. Softer inflation could help wages rise further.

Salary tracker compiled by job listings website Indeed shows a slowdown: Salaries posted in job postings fell for the ninth straight month in December.

The decline in wages 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, rose a healthy 6.4% last year. However, this is roughly half the growth rate in 2021. Average wages for retail workers also fell.

“We’re well past the peak in monthly wage increases,” said Claudia Sahm, a former Fed economist and founder of Sahm Consulting.

Sahm also noted that rising wages do not always translate into rising prices. Although many companies pass on the cost of a higher salary to customers by paying more, they can make their employees more efficient or find other savings to offset the higher salary.

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

Ron Hetrick, chief economist at Lightcast, a data analytics firm, noted that strong wage increases typically follow a shock in the job market. An example of this is the rapid reopening of the economy after the outbreak of the pandemic in early 2020. Millions of employers tried to increase employees at one time.

After that time has passed, Hetrick said companies can make adjustments. Even if unemployment remains low, employers don’t have to constantly pay higher wages to fill jobs. For example, they may try to automate some tasks. Many companies have done so in Japan, where unemployment has been low for years.

“You’re seeing some signs that there’s a little less frenzy to hire,” Hetrick said.

The number of temporary workers has decreased for five months. The length of the average working week decreased in December. Both signs suggest that companies are less desperate for labor.

The fact that many employers are shortening work weeks rather than cutting jobs also shows that they want to keep workers during a slowing economy. As many businesses have struggled to hire workers in the past two years, businesses are now reluctant to let them go.

“That’s how you get a soft landing,” Hetrick said. “By asking workers not to produce as much. But this does not mean that you can get rid of them.”

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