A year ago, a large percentage of economists were predicting that by now, the economy either would be in a recession or clearly headed for a recession. But instead, we’ve seen a different picture develop of the economy.
The most followed measure of the stock market, the Dow Jones Industrial Average, is 1,000 points higher than it was last June. While there have been some layoffs in sectors like technology, economists continue to be surprised by robust increases in jobs almost every month. A higher percentage of people are planning vacations this year compared to 2022. And housing prices actually rose in April.
A recent poll of economists showed fewer than 50% think there will be a recession in the next year. This is exactly the opposite of the same poll in January.
What has changed to make economists more optimistic?
Although inflation is certainly still an issue, it has been steadily moderating from its peak of over 9% last year. A lower inflation rate makes it possible for more workers to receive pay raises that keep up with rising prices. When this happens, the worker’s standard of living rises.
A lower inflation rate allows the Federal Reserve (also known as the “Fed”) to ease up on its interest rate policy.
Now with the inflation rate almost cut in half there is more expectation the Fed will stop raising interest rates, which means the chance for a future recession is lessened.
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A strong job market
For most people, the labor market is where they see the damage caused by a recession. Layoffs and unemployment force households to tighten budgets and reduce spending. The reduced spending translates into lower sales for businesses and likely more layoffs.
But rather than slowing, the pace of job gains has strengthened. The number of jobs added in May was much above expectations and twice as high as in April.
In my opinion, there are two explanations for the strong labor market. One is the return to the pre-pandemic economy. People are going out, eating at restaurants, taking trips, and returning to gyms and other personal services. These are all businesses that were hard hit during the pandemic. For most, those worries are now in the past. As a result, the aforementioned sectors are seeing revivals in activity and are hiring more workers.
The second explanation is that many businesses may be reluctant to lay off workers even if economic conditions warranted it. Some have called this a “hoarding” of workers.
There are still worries about the economy
The Fed could still decide to further increase interest rates. With the Saudis announcing more oil supply cuts, gas prices could increase. Then, there’s the always unpredictable stock market.
There’s a third option in addition to the “no recession” or “yes recession” possibilities. I’ve named the third option, the “full employment recession,” or FER. In the FER, the job market remains strong, mainly as a result of the aftermath of the pandemic. But selected other sectors commercial real estate, manufacturing, commodities and possibly big-ticket consumer purchases retreat as they would in a typical recession.