The US economy is growing. Why do economists worry about the recession?

The rapid recovery in consumer spending has sunk supply chains and pushed up prices. (KP Jones / The New York Times)

Employers add hundreds of thousands of jobs a month, and if they find them, they will hire even more. Consumers are spending, businesses are investing, and wages have been rising very rapidly over the decades.

So naturally, economists warn of a possible recession.

Rapid inflation, rising oil prices and global volatility have pushed forecasters down sharply this year, raising their prospects for a complete contraction. Investors share that concern: the bond market last week issued a warning signal that often – if not always – forecasts a fall.

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Such predictions may seem confusing when the economy, by many measures, is booming. The United States has regained more than 90% of the jobs lost in the early weeks of the epidemic, and employers continue to hire, adding 431,000 jobs in March alone. The unemployment rate has dropped to 3.6%, slightly higher than the pre-epidemic level, which was less than half a century.

But for the Doomsday, the significant strength of the recovery lies in the seeds of its own destruction. Demand – for cars, homes, restaurant food and workers to supply them – is greater than supply, which has led to the fastest inflation in 40 years. Policymakers in the Federal Reserve argue that it can cool the economy and reduce inflation without increasing unemployment and causing a recession. But many economists are skeptical that the central bank will be able to design such a “smooth landing”, especially at such a moment of extreme global uncertainty.

“It’s like trying to land during an earthquake,” said Tara Sinclair, a professor of economics at George Washington University.

William Dudley, former chairman of the Federal Reserve Bank of New York, called a recession “almost inevitable.” He was one of the economists who argued that if the central bank had started raising interest rates last year, it could have managed to control inflation by tapping the brakes on the economy. Now, the economy is growing so fast – and prices are rising so fast – that the only way to gain control of the central bank is to slap the brakes and cause a recession.

However, most forecasters say a recession is unlikely next year. Aneta Markovska, chief economist at investment bank Jefferies, said higher oil prices, rising interest rates and falling government aid would all slow growth this year. But corporate profits are strong, families have trillions of savings, and debt burdens are low – all of which should provide a mattress against any recession.

“It’s easy to create a very negative story, but when you really look at the magnitude of those impacts, I don’t think they are significant enough to push us into recession over the next 12 months,” he said. Recessions, by definition, include job losses and unemployment; Now, companies are doing everything they can to retain workers.

“I do not see why businesses should make 180 full, and from ‘we have to hire all of them, we can not find them,’ ‘Markovska said.

However, economists are bad at predicting a recession. So, now it makes sense to focus on where the recovery is, and focus on the forces that threaten to prevent it.

Growth will slow down. That’s not a bad thing at all.

Last year was the best year for economic growth since the mid-1980s and the best year for recorded job growth. Those kinds of explosive gains – activated by vaccines and triggered by trillions of dollars in government aid – are unlikely to happen again this year.

In fact, some recession is probably desirable. The rapid recovery in consumer spending, especially on cars, furniture and other goods, has plunged supply chains and pushed up prices. The demand for labor is so strong that jobs remain unfilled despite rising wages. Jerome Powell, chairman of the central bank, recently said that the labor market was “unhealthy”.

Some economists, especially the left, have taken up the claim, arguing that the hot labor market is good for workers. But even most of them said the latest pace of job growth was unlikely to last long.

“We have returned to normalcy at a very fast pace and it would be unbelievable to think that it could continue,” said Josh Bivens, director of research at the Institute for Economic Policy, a progressive think tank. He said even low wage growth would not be a concern until wage increases were further reduced behind inflation.

But some economists have warned against a recession at a rare time when low-wage workers are seeing significant wage increases and vulnerable groups fall into unemployment. The unemployment rate among black Americans fell to 6.2% in March, but still more than double that of white Americans.

“Recovering from my perspective is so strong, so why not enjoy this now?” Said Michelle Holder, president of the Washington Center for Equality Development, a progressive think tank. He said economists were right to be concerned about high inflation, saying “I do not think the same voices about high unemployment have lost shape.”

Recession does not have to mean recession. (In theory.)

The key question for policymakers is whether they can cool the economy without putting it into a deep freeze. Powell argues that they can, however he admits it is not easy.

His argument goes like this: There are 11 million open jobs and less than 6 million unemployed workers. There are more home buyers than home buyers, and more car buyers than available cars. By gradually raising interest rates and making borrowing more expensive, the central bank hopes to restrict demand for workers and housing and cars, but not to the extent that employers will start cutting jobs.

This is a tricky balance, and historically the central bank has often failed to achieve it. But unlike after the last recession, when the slow recovery of the mill was found to be in constant danger of stagnation, the current resurgence is fast enough to lose considerable momentum without going upside down. Employers can cut hiring plans, for example, to have jobs for anyone who wants to practice.

Some economists are optimistic that supply barriers will ease as the epidemic slows, which will allow inflation to cool without the need for a central bank to reduce demand. There are some signs that this is happening: more than 400,000 people rejoined the labor force in March because of the declining corona virus cases and more reliable school schedules that allowed more people to return to work.

Aaron Sojorner, an economist at the University of Minnesota, said policymakers should not think of the economy as “feverish” or “overheating” because its potential is limited by epidemics.

“When you have a fever, you can’t function as much as you can when you are healthy, and even if you do less than you can, the sweat comes out,” he said. Said. Improvements in the public health crisis, he said, should allow the flu to break out.

A lot can go wrong.

For most of last year, Fed officials shared Sojourner’s view that inflation would soon dissipate as a result of epidemics. When those setbacks proved to be more prolonged than expected, policymakers changed course, but it was too late to prevent inflation from rising more than they had hoped to allow.

The challenge is for central bankers to make decisions before all the data is available.

For example, the imbalances that led to rapid inflation have largely begun to disintegrate on their own. Federal aid programs created at the onset of epidemics are often over, and many families are reducing their savings. When the supply starts to catch up it will reduce the demand. In that situation, if the central bank acts too aggressively, it may reduce the recovery.

But strong job growth and wage increases keep consumer demand high while supply chain disruptions and labor shortages persist. In such a situation, if the central bank is very cautious, there is a risk that inflation will go further out of control. The last thing that happened was that under Paul Volker the central bank had to trigger a recession that would bring inflation to a heel in the early 1980s.

Powell argued that it was not too late to prevent such a “difficult landing”. But while a recession is inevitable, it is unlikely to happen overnight.

“I do not think we’re going to go into recession for the next 12 months,” said Megan Green, a senior colleague at Harvard’s Kennedy School and global chief economist at the Crawl Institute. “I think it’s possible in 12 months after that.”

Global turmoil complicates everything.

Earlier this year, forecasters saw February or March as the time when major inflation indexes would begin to peak and fall. But the war in Ukraine and the resulting rise in oil prices shattered that hope. Year-on-year inflation hit a 40-year high in February, and almost certainly accelerated in March as gas prices peaked at $ 4 a gallon for most of the country.

Infection is also a wild card. In recent weeks China has imposed stricter locks in some parts of the country in an effort to curb the spread of corona virus cases, and a new sub-variant has led to an increase in cases in Europe. Even if the United States avoids another corona virus wave, it could prolong the global distribution chain disruption.

“The unknown is the largest global supply chain and how we manage them all because it is a continuation of Chinese COVID policy and a war in Europe,” Green said.

Rising gas prices, stock market volatility or fears of a coup d’tat are no indication that consumer spending or businesses are reluctant to rent. But those factors add to the uncertainty, making it difficult for policymakers to determine where the economy is heading and how to react.

© 2022 The New York Times Institute

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