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Business News

How US economy could avoid a recession, according to economists

todayJuly 22, 2022

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(NEW YORK) — As recession forecasts have grown dire in recent months, they’ve faced one complication: Strong economic data.

The U.S. showed robust job growth last month, defying expectations of a slowdown and keeping the unemployment rate at a near-historic low of 3.6%. Meanwhile, retail spending, a key indicator of economic health that reflects consumer appetite, rose 1% in June, outpacing gloomier predictions — even if some of that increase can be attributed to rising prices due to inflation.

The positive signs have fueled caution about the rush to pessimism.

“While sentiment has shifted, little of the data I see tells me the U.S. is on the cusp of a recession,” Citigroup CEO Jane Fraser said during the company’s earnings call on Friday.

The trend raises the question of whether the U.S. could avoid a recession altogether.

In a sense, the answer is an unequivocal no, economists told ABC News. Ultimately, a recession is inevitable, since it makes up a natural part of an economic cycle marked by alternating periods of growth and contraction.

But the continued strength of the economy meaningfully challenges expectations that a recession will come to pass anytime soon, as robust hiring and healthy household and business balance sheets provide a buffer for a potential slowdown, they added. One economist, Jeremy Swartz of Credit Suisse, said it’s more likely that the economy will avoid a recession right now than undergo one.

Inflation

A stark imbalance between supply and demand poses a daunting challenge over the mid- and long-term, some less-optimistic economists said. In light of that imbalance, economic strength becomes a liability, since a supply bottleneck can’t keep up with hiring and spending, resulting in crippling inflation.

Safely navigating that predicament over the coming years — without triggering a recession — will require an unlikely but possible series of events, Aneta Markowska, chief economist at New York City-based financial services company Jefferies, told ABC News..

“There’s a consensus view right now that a recession is imminent — that, I think, is premature,” Markowska said. “We have an economy that’s already overheated, like a plane that has overshot the runway, which makes it incredibly difficult to land it softly. There’s certainly a scenario for how we could achieve that. But I think that scenario involves a lot of things going very, very well.”

Supply and demand

At the crux of current economic risk stands a glaring asymmetry between traditional supply and demand, according to Markowska and Lindsey Piegza, the chief economist at Stifel, a St. Louis-based investment bank.

A surge in demand followed a pandemic-induced flood of economic stimulus that combined with a widespread shift toward goods instead of services, as hundreds of millions across the globe facing lockdowns replaced restaurant expenditures with couches and exercise bikes. Meanwhile, that stimulus brought about a speedy economic recovery from the March 2020 downturn, triggering a hiring blitz.

But the surge in demand for goods and labor far outpaced supply, as COVID-related bottlenecks slowed delivery times and infection fears kept workers on the sidelines. In turn, prices and wages skyrocketed, ultimately prompting sky-high inflation that has not only endured for many months but gotten worse, Markowska and Piegza said.

The consumer price index, or CPI, stood at 9.1% last month, a significant increase from 8.6% in May, according to the Bureau of Labor Statistics. That is the largest 12-month increase since December 1981.

To avert a recession, the U.S. will need to slow demand while increasing supply, in turn bringing the two into balance, Markowska and Piegza said. But both sides of that task pose thorny problems, they added.

Interest rates

To weaken demand, the Federal Reserve has embarked on a series of hikes to its benchmark interest rate, which raises borrowing costs for consumers and businesses alike. That should slow the economy and slash demand.

Since U.S. households have stockpiled savings and the economy has accumulated millions more job openings than job seekers, in theory, the rate hikes could weaken the high demand without harming economic output, Markowska, the chief economist at Jefferies, said.

“The idea is that we can destroy that excess demand without actually destroying activity,” she said.

In reality, the task is much more difficult, Markowska said. The persistently strong economic conditions will prompt the Fed to take more aggressive action, which increases the risk of an abrupt economic slowdown that brings about a recession, she explained. For instance, in order to slow down a hot economy enough that healthy companies will abandon hiring and ease labor demand, Fed actions will likely trigger significant layoffs at other companies in a more precarious financial position, which could bring about a decline in demand that goes too far and pushes the economy toward a recession, she added.

Policymakers

Swartz, the economist at Credit Suisse, contested the view that strong economic performance raises the risk of recession. Instead, positive indicators like robust hiring show that the economy is healthier than many people think, he said.

“It’s not fully a situation where good news is bad news and bad news is good news,” he said. “All things being equal, we still like to see stronger growth.”

While demand weakens, supply will need to grow, economists said. That will require a set of outcomes that extends well beyond the control of U.S. economic policymakers, Piegza, the chief economist at Stifel, said. In order to relieve COVID-induced supply bottlenecks, countries like China will need to relax ongoing lockdowns. Moreover, a fix for global oil and agricultural shortages depends on an end to the Russia-Ukraine war, Piegza said.

“It’s out of the Fed’s control and the federal government’s,” she said. “You would need the dominos to line up with a certain level of precision.”

“That scenario has a very low probability but it’s not a zero probability,” she added.

While possible, the rosy outcome is far less likely than a downturn, Piegza said.

“Essentially, there’s a good chance, or a heightened probability, of a recession by the end of the year,” she said.

Markowska offered a slightly more optimistic forecast for the chances of a recession.

“In the next six months, I’d put it at 10%; in the next 12 months, I’d put it at 30% or 40%; in the next 24 months, I’d put it at 70%,” she said.

But she isn’t ruling out the possibility that the U.S. will avoid a recession altogether.

“We basically have to get really lucky,” she said.

Swartz, the economist at Credit Suisse who thinks the U.S. is more likely to avoid a recession than experience one, said the overall negative mood about the economy risks hurting consumer and business sentiment while helping induce a recession.

One place where that gloomy outlook can be found is on Wall Street, which saw a historic plunge in the stock market over the first half of the year. The S&P 500 — a popular index to which many 401(k) accounts are pegged — plummeted 20.6%, marking its worst first-half performance of any year since 1970.

“The general mood is obviously extremely poor,” he said. “There’s a question of whether that can become self-fulfilling.”

“That’s something we’re concerned about and contributes to heightened recession risk,” he added. “But there’s nothing automatic about it.”

Copyright © 2022, ABC Audio. All rights reserved.

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