Steady Hiring and Consumer Spending
Despite predictions from business executives, economists, and investors, a U.S. recession remains elusive. The Labor Department reported on Friday that employers added 2.75 million jobs over the past 12 months, including 272,000 in May.
This steady hiring continues to fuel consumer spending, driving an economic expansion unlike any seen in recent history. The unemployment rate has stayed at or below 4% for 30 months, a consistency last seen during the Vietnam and Korean wars.
However, just because recession predictions have been wrong so far doesn’t mean they are not possible. The unemployment rate did tick up to 4.0% last month from 3.9% in April, a rise from its post-pandemic low of 3.4% in April 2023.
The hire rate from companies has fallen to levels last seen seven years ago, and job vacancies have returned to pre-pandemic levels.
Labor force is seasonally adjusted
Labor Market and FED Decision
The labor market‘s imbalances have resolved without triggering a recession so far.
Two years ago, the FED increased interest rates at the fastest pace in decades to fight against inflation, initially thought to be short-lived. Companies scrambled for workers, offered large raises and bonuses, and prices went up. Many believed higher unemployment was necessary to balance supply and demand.
While businesses aren’t shedding workers yet, pressures may mount if higher rates erode margins and profits slump. The labor force has expanded dramatically, bouncing back from a sharp downturn at the pandemic’s onset.
Many households and businesses had locked in ultra-low borrowing costs after the FED pushed rates down in 2020 and 2021, shielding them from subsequent hikes.
Consumer Behavior and Housing Market Oddities
Economic activity has been supported more by wealth and incomes than by credit.
Changes in spending habits, combined with higher asset prices, solid job prospects, and government stimulus, left many households feeling financially secure.
The U.S. housing market exemplifies pandemic-era economic oddities, with higher rates hitting demand and supply.
Homeowners with low-interest mortgages are reluctant to move, and the average 30-year mortgage rate recently hovered near 7%, up from 3% three years ago. Despite high rates, homebuilders have seen inventory levels rise to their highest in over a decade.
Rising Challenges
Consumers, though less confident in surveys, are spending more. The ratio of household net worth to income has been higher in recent years than pre-pandemic levels. When Fed rate hikes threatened hiring in housing and manufacturing, new government spending on infrastructure and factories provided support.
Last year, increased immigration boosted employment, supported spending, and eased wage pressures. However, low-income consumers have depleted pandemic-era savings and turned to credit cards, facing rising delinquencies.
The Fed’s Balancing Act
The Federal Reserve aims to balance cutting rates too soon and allowing inflation to persist versus keeping the rates high and risking an unnecessary slowdown. Fed officials are expected to maintain rates steady at their next meeting, waiting for more data on inflation and employment before taking further action.
The Path Ahead
As the Fed navigates these challenges, the U.S. economy continues to “muddle through” with strong job growth and great consumer spending.
The risk of a recession remains…
BUT so does the possibility of sustained inflation if rate cuts reignite economic activity too soon. Investors and businesses are cautiously optimistic, waiting to see if the Fed can engineer a soft landing without tipping the economy into recession.
