The post-pandemic US economy has tormented economists and defied expectations.
Nobody guesses what will happen next.
In the optimistic camp is Treasury Secretary Janet Yellen, who told CNN’s Fareed Zakaria last week that a devastating recession could be avoided.
“I think what people call a soft landing is possible,” she said. “I think there is a way to bring down inflation while maintaining what I think we would all consider a strong job market.”
After months of inflation at near 40-year highs, prices are starting to cool. The consumer and producer price readings show inflation at its slowest pace since the start of the crisis: the producer price index posted annual growth of 2.7% in March, and the consumer price index at 5% is down significantly from a peak of 9.1% last summer. .
And the great American job market continues to advance. The unemployment rate of 3.5% is near its lowest level in half a century. By most measures, the job market is stronger today than it was in February 2020, before the Covid pandemic sent the global economy into a tailspin. More Americans work, and they make more money.
The Treasury Secretary said she sees the rising unemployment claims, the decline in job opportunities and the rise in labor force participation as evidence that tensions in a very tight labor market are easing – which is a good thing.
“I think a strong labor market and lower inflation are compatible goals,” Yellen said.
Economists at Goldman Sachs predict only a 35% chance of a recession, noting that “the rebalancing of supply and demand is on track.”
But there are dangers around every corner.
A bout of bank stress last month surprised global markets and may slow lending activity.
The bank’s pressure was a byproduct of the Fed’s aggressive rate hike campaign. Monetary policy is lagging behind. Forecasters are now struggling to understand how it will reverberate through the economy, and when.
This is why many economists are firmly in the negative camp. A Bloomberg survey of forecasters pegs the odds of a recession at 65%.
The International Monetary Fund last week slightly lowered its forecast for global growth, in more alarming language than usual.
“Uncertainty is high, and the balance of risks has shifted strongly to the negative side as long as the financial sector remains unstable,” the IMF said, noting that it is difficult to make forecasts at all in this environment.
“The haze surrounding the global economic outlook has intensified,” she said.
Adding to the gloom, the Washington debt ceiling tragedy, if unresolved, will certainly risk a US debt default, a worsening economy, and roiling the bond and stock markets.
Even optimists like Yellen acknowledge risks. But it has been difficult to keep the economy resilient.
Early in earnings season, the big banks are looking better than good, and other companies are beating analyst expectations. Oil prices have fallen sharply compared to last year, partly reflecting global growth concerns – but at the same time lowering costs for oil consumers.
And the stock markets have run up a wall of anxiety, says the old Wall Street trader.
The Dow Jones is up 2.5% this year, the broader Standard and Poor’s 500 is up more than 8%, and the Nasdaq Composite is up 16% in 2023.
One explanation is that the sheer rout in equities last year may have factored in the worst-case scenario for the economy. Last year was the worst year for equity investors since the Great Financial Crisis.
Another reading is that a recession, if there ever was one, would be light and short, without a significant rise in the unemployment rate.
Conclusion: no one knows for sure.