WASHINGTON — Only a few months ago many economists warned that a recession was not just inevitable, it was around the corner. Inflation would take years to curb. Surging unemployment was on its way.
But a funny thing happened on the way to hard times: The "Big R" for the U.S. economy now looks like it's "Resilience," not "Recession," as economists at Bank of America recently put it.
Instead of showing a slowdown in hiring last month, as normally happens in the prelude to a recession, employers added more than half a million jobs. Unemployment, which rises during a downturn, plunged to 3.4%; it hasn't been this low since the spring of 1969.
Meanwhile, the inflation dragon continued to calm down, dropping to 6.5% from its high last year of 9.1%.
So what's going on?
While recessions are a regular feature of economic history, warnings of imminent trouble are looking exaggerated.
Digging a little deeper, here are some of the questions economists and government policymakers are wrestling with, along with the best answers available now:
Are we heading into a recession or not? Prices are still high and big companies, especially in tech, are announcing layoffs.
Yes, there has been a surge in layoffs. But it's been largely offset.
Technically, you can't have a recession without higher unemployment. A recession is commonly defined as two consecutive quarters with negative growth in the overall economy. As long as employers keep hiring more workers, the economy will keep growing because more and more people have jobs and money to spend.
The economy on average added a robust 400,000 net new jobs a month in 2022. And hiring was even stronger at the start of 2023, with employers across a broad spectrum of industries fattening their payrolls by 517,000 in January.
And the Labor Department says the number of job openings rose at the end of last year, to more than 11 million. That's double the number of vacancies of a few years ago.
Where is this job growth coming from?
Consumer spending, mostly. That's the biggest driver of the U.S. economy, and so far it hasn't gone off the rails.
In fact, it's held up pretty well. Although Americans aren't buying as much furniture, in-home gym equipment and other stuff, they've stepped up their spending for services such as travel, eating out and entertainment.
The change reflects an apparent easing of the COVID-19 threat. During the worst of the pandemic, people tended to stay home and, not surprisingly, focused their spending on things that made staying home seem better.
Now, the pattern has reversed.
That's not to say there are no trouble spots in the economy. Manufacturing and housing, always sensitive to interest rates, are both in a slump.
But with consumer demand still growing overall, many businesses see good reasons to bulk up. Others are expecting any near-term recession to be relatively short and mild, so they're not slashing operations.
Does that mean the fate of the economy now hinges on the whims of consumers?
No, employers have other reasons to avoid big cutbacks. Overall in the United States, workers are in short supply. Higher levels of immigration during the Biden administration have eased the pressure, although skilled workers are still relatively scarce.
Also, many employers who laid off workers en masse during the pandemic have discovered it's surprisingly hard to reassemble teams and get a business running smoothly again, especially a smaller business.
There is a lot of labor hoarding going on, says Diane Swonk, chief economist at the accounting firm KPMG US.
Then what's going on with tech companies?
It's true that technology firms have sharply cut back after years of expansion — and overexpansion, in many cases. The list is a who's who in tech: Microsoft, Amazon, Meta, Google, IBM, Dell, Cisco and Twitter have announced thousands of layoffs.
In all, more than 1,000 tech companies announced cuts of almost 160,000 jobs last year, according to the tracking website Layoffs.fyi. And nearly 100,000 more jobs already have been tagged this year.
Even so, the blow to the overall economy isn't as big as these numbers may make it appear. For one thing, many tech workers seem to be getting quickly reemployed. In a survey by ZipRecruiter, 8 out of 10 had found a job within three months of a layoff.
What's more, although they are among the best-paying jobs, the tech layoffs represent just a speck of total payroll employment. The category of business and professional services, which includes many tech workers, has almost 23 million jobs and continues to grow. New jobless claims, a proxy for layoffs overall, remain at historically low levels.
That helps explain why the latest Bay Area unemployment rate, for December, was just 2.4%. And it was 2.7% for Austin, Texas, another home to many tech firms.
With inflation and a tight job market, shouldn't wages be increasing?
Economic theory does suggest that wages should be growing faster as employers compete for a shrinking pool of available workers. There are about two job openings today for every unemployed worker.
Yet the average hourly wage for all private-sector workers rose 4.4% in January from a year earlier, down from recent prior months when earnings were increasing at an annual rate of well above 5%.
"All of this adds up to a job market that is a bit schizophrenic — where job growth is booming but wage growth is cooling," wrote Harry Holzer, a Georgetown University professor and former chief economist at the Labor Department.
Maybe, he speculated, workers have used up money in the bank from the extra savings they amassed during the pandemic and so are more concerned with staying on the job than demanding more pay.
Similarly, with inflation declining in recent months, pay increases feel less urgent to workers.
There's also evidence that workers are quitting somewhat less than they did in 2021 and the first half of last year. Workers tend to get the biggest bump up in pay when they change jobs.
A final factor: Businesses are hiring more people who have traditionally been on the economy's margins, such as workers with disabilities and those with criminal convictions, said Jeffrey Korzenik, managing director at Fifth Third Commercial Bank in Florida.
"When you broaden your effective applicant pool, you don't have to pay up as much for labor, hence the moderating wage inflation," he said. "We have a big gap between job seekers and job openings — the business community is doing a better job of eliminating the barriers that have created this historically large gap."
Inflation is falling but is still pretty high. Is the Fed finished with the rate hikes?
Inflation, as measured by the consumer price index, appears to have peaked at a 40-year high of 9.1% last June. CPI growth has since come down to 6.5% as of December, thanks to softer inflation readings for energy and a variety of goods, including vehicles, apparel and appliances.
Most experts expect CPI growth to keep trending lower this year. But Fed Chair Jerome H. Powell suggested again this week that it could be a long and hard battle to bring inflation down further.
Over the last year, the Fed has lifted its benchmark rate from near zero to a range of 4.5% to 4.75%. Many investors are betting that the central bank will make two more smaller rate increases of a quarter of a point each, stopping at the upper limit of 5.25%. But that may not be enough.
"If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than has been priced in," Powell said.
On the positive side, price pressure for many goods has let up as pandemic-induced supply bottlenecks and excessive demand have eased. And slowing wage and employee compensation growth has quieted concerns about a wage-price spiral.
So we can stop worrying about a recession?
Hold on. No one said that. There are still several things that could derail the economy.
At the top of economist Mark Zandi's worries is a resurgence of oil prices. Though the chief economist at Moody's Analytics now sees less than a 50% chance of a recession, he says anything triggering another big run-up at the gas pumps will probably push the economy over the edge.
The surge in crude prices, triggered by the war in Ukraine, was central to the outbreak of inflation and was felt broadly across the economy, especially in consumer confidence. In recent days, regular gas prices nationally were averaging about $3.45 a gallon. "If we go back up to $4 or $5 a gallon, that will be too much to bear," Zandi said.
So far, Fed officials have aggressively raised interest rates to help bring down inflation without quashing the economy. Whether policymakers can keep threading the needle remains to be seen.
The Fed doesn't want to take its foot off the financial brakes before getting inflation under control, but restraining activity too hard or too long will almost surely induce recession.
And like the sword of Damocles, the debt ceiling deadline hangs ominously over the economy.
Technically the U.S. last month already hit the debt ceiling, or the amount Uncle Sam is able to borrow. In practice, the Treasury Department can keep paying the nation's bills by employing so-called extraordinary measures, but only until about early June.
A repeat of the kind of political standoff seen in 2011 would have potentially grave and far-reaching consequences, and it's not clear that lawmakers have learned the lessons from that tumultuous period.
During President Obama's first term, partisan brinkmanship over the budget took the country to the edge of defaulting on its debt. That prompted Standard & Poor's to downgrade the U.S. from its top credit rating for the first time in history, wreaking havoc on Wall Street and shaking the stability of the U.S. and global financial systems.
With a newly installed Republican House eager to flex its muscles, analysts fear the stage is set for an even worse and potentially calamitous outcome this time.
