[ad_1]
Getty Images
Confused about the economy? You’re not alone.
At the start of the year, warnings of a looming recession seemed to be everywhere, like in this NPR story.
But so far, to the surprise of many experts, the economy has proven to be remarkably resilient.
So what gives? Does this mean recession fears are over?
Here’s what you need to know about the state of today’s economy.
Why are things looking better?
For two years, inflation has been the dark cloud hanging over the economy, but we’re beginning to see patches of blue sky.
Annual inflation in June was just 3% — still above what the Federal Reserve would like, but a big improvement from a year earlier when inflation topped 9%.
What’s more, this progress has come with very little pain in the job market, even as the Fed has raised interest rates in the most aggressive fashion since the 1980s.
The unemployment rate is currently 3.6%, close to a 50-year low. And employers are still adding a couple hundred thousand jobs every month.
Thanks to that strength, wages are now climbing faster than prices, so workers can actually buy more with their paychecks.
All of that is pretty encouraging and suggests there might be a wider path to the elusive “soft landing,” in which inflation is tamed without a big jump in unemployment.
That seems contrary to what many were expecting?
Indeed. Economic forecasters have become significantly more optimistic.
A January survey by the National Association for Business Economics found just 42% of forecasters thought the U.S. was likely to avoid a recession in the next 12 months. When the survey was conducted again in early July, 71% of forecasters said a recession is unlikely in the coming year.
And you can see this improving outlook clearly on Wall Street. At the start of 2023, markets were bracing for a tough year, especially with a debt ceiling showdown looming.
There were rough spots, for sure. Investors were rattled in March by the collapse of some mid-sized banks.
Justin Sullivan/Getty Images
But regulators stepped in, taking over Silicon Valley Bank and Signature Bank and then helping engineer the sale of a third failed lender, First Republic Bank, to JPMorgan Chase in May.
Then House Republicans and White House averted what would have been a disastrous debt default.
Those developments helped soothe a lot of nerves on Wall Street.
And more recently, investors have taken stock of the economy and they have been even more relieved it hasn’t turned out quite as bad as they had first feared.
The result is that all three major stock indexes — the Dow Jones Industrial Average, the Nasdaq and the S&P 500 — are in bull markets, having gained 20% or more from their most recent lows.
On a conference call with investors this week, Wells Fargo CEO Charles Scharf said what many forecasters are saying: “The U.S. economy continues to perform better than many expected.”
So how are the experts looking at the economy now?
These days, the word that seems to be catching on in Wall Street and corporate suites is one that also starts with an “R”: No, not recession, but resilient.
Economists at Goldman Sachs have been unusually confident among their peers that the Fed would be able to get inflation under control without triggering a recession.
Jim Watson/AFP via Getty Images
But now, Goldman is sounding even more upbeat, putting the odds of a recession at just one in five.
“Why are we more optimistic?” asked Jan Hatzius, Goldman’s chief economist. “To us the economy continues to look quite resilient.”
And again, the strong job market is a big factor.
So are recession fears gone now?
Not by a long shot.
Because inflation is still higher than the Federal Reserve would like, policy makers are widely expected to raise interest rates by another quarter percentage point this week.
These rate increases make it more expensive to get a car loan or to finance a business or to carry a balance on your credit card.
Moreover, the ripple effects of rate hikes come with a lag. It’s possible that the pain usually associated with higher borrowing costs hasn’t caught up with the economy yet … but that eventually it will.
A number of forecasters — like those at Citigroup — still believe there’s a recession on the horizon. It’s just taking longer than expected to materialize.
Certainly there are some parts of the economy that are feeling a slowdown already. Manufacturing, for example, has been in a slump for a while.
Even though consumers are still spending money, they’re spending more of it on services — like eating at restaurants or traveling — and less on stuff. As a result, factories, which make stuff, are feeling the squeeze.
And the prospect of a downturn in the job market is still possible. That would mean more layoffs than what the economy has experienced so far.
So how to navigate this uncertain time?
Unfortunately, despite all the recent positive news about the economy, this period of uncertainty will continue for both regular folks and CEOs alike.
Tesla CEO Elon Musk last week captured what many people are likely to be feeling about the economy.
“One day it seems like the world economy is falling apart, and the next day, everything is fine,” Musk said on a call with Wall Street analysts. “I don’t know what the hell is going on, to be totally frank. I wish I did.”
JPMorgan Chase CEO Jamie Dimon was similarly unsure about where the economy is heading, noting there are “a range of outcomes” and urging investors to “take a deep breath” and hope for the best.
Justin Sullivan/Getty Images
What are some of the things to watch?
Of course, experts will continue to closely scrutinize the key economic indicators, mainly inflation and the labor market.
Company profits will be another important gauge. So far, only a fraction of companies have reported earnings for the most recent quarter.
Another thing to watch is how companies are handling their debt. Many corporations borrowed money when interest rates were really low. How will they manage that when it comes time to refinance, likely at much higher rates?
Commercial real estate is another big question mark. There’s a lot of unused space in office buildings because many people are still working remotely. What happens to the loans on that real estate, and what does that mean for banks that financed them — especially smaller, regional banks?
There are other potential speed bumps in the road. The extra cash cushion that many people piled up in the early months of the pandemic is being whittled away.
And payments on student loans that were suspended during the pandemic are about to start up again. That will leave less money in people’s pockets to maintain that robust spending.
All this is to say, it could still be a very bumpy ride.
[ad_2]
Source link
Comments are closed.