If this is a recession, it is a weird one.
It might be time to open up a perhaps surprising possibility here, at least if you’ve been paying attention to the chatter around high-profile layoffs and a potential recession. The economy seems like it’s … kind of in a pretty decent spot.
Employers added 517,000 jobs in January, according to the latest report from the Bureau of Labor Statistics, and the unemployment rate fell to 3.4 percent, its lowest level since 1969. Job growth was widespread across sectors, meaning a lot of gains all over the place. (There’s some wonkiness around this specific report’s numbers as reporting data has changed; still, this number and the overall trajectory are very strong.) Elsewhere in economic data, job openings rose in December and weekly jobless claims remain low. The US economy grew at a faster-than-expected pace in the fourth quarter of 2022.
Things are not perfect. The housing market is struggling, tech companies seem to be cutting parts of their workforces left and right, and inflation is still here and cutting into wage growth, though it’s slowing down. How far the Federal Reserve will go to tame inflation is the elephant in the room here, and one that could bring on the recession everyone’s been talking about for months.
Still, for all the sky-is-falling talk around the economy, it appears the sky is staying where it is for now. I called up half a dozen economists to ask the question a lot of people have right now: Is the economy good? The answer — with a multitude of caveats — was generally that it is.
“If you want a dramatic one-word answer, the answer is yes,” said Justin Wolfers, an economist at the University of Michigan. “Unemployment’s at a 50-year low, that’s the standard metric for thinking about how the economy is performing,” he said. “Job growth is continuing, so it’s not only good, it’s getting better, and it’s getting better at a really rapid rate. In 2022, we added the second-most jobs in recorded history, all the way back to 1939.”
“Hundreds of thousands of people getting jobs, the unemployment rate at a 50-year low, we shouldn’t be questioning whether that’s good or not,” said Claudia Sahm, a former senior economist at the Fed. She noted, though, that the situation is still complicated. “That doesn’t mean that we have ‘mission accomplished’; inflation is still high.”
“Overall, the nominal economy is extremely strong, the labor market is extremely hot, the issue is the gains we’re getting have been eaten up by inflation,” said Marc Goldwein, senior vice president and senior policy director at the Committee for a Responsible Federal Budget. “We’re clearly not in a recession, I don’t know why people have been saying that. But the big question is, what has to break?” Or maybe, he suggests, nothing has to break at all and the economy can just slow down without going negative.
It’s impossible to predict the future, and the economy has been super weird for a while — it turns out a global pandemic had the potential to throw a lot of things out of whack, as did Russia’s war on Ukraine, among other factors. Inflation makes everything feel terrible.
Still, for all the economic negativity going around lately, it could be a moment for at least a modest bit of optimism, with the understanding there are no guarantees going forward.
Despite all of the headlines around job cuts in tech, finance, and media (including the media company that owns the website you are reading right now), the job market genuinely looks really good. The rebound from the pandemic, during which millions of people lost work, has been swift and robust. According to research from the Federal Reserve Bank of Cleveland, workers who were displaced during the Covid-induced recession saw better earnings and employment outcomes than workers who lost jobs during previous recessions.
“It is pretty clear that the investments we made in people over the course of the pandemic actually worked,” said Rakeen Mabud, an economist at the progressive think tank the Groundwork Collaborative. “It drove a tighter labor market, it drove wage gains, especially at the bottom, and people had more agency.”
The headlines about layoffs and a looming recession can make you wonder if these things are “coming from different universes” when looking at data like January’s jobs report, said Nick Bunker, economic research director at Indeed. “There are some sectors that are just going through it right now, and they have been grabbing a lot of attention,” he said.
Much of the discourse is centered on layoffs at places like Google and Goldman Sachs and overlooks similar markers, like Chipotle hiring 15,000 people for whatever burrito season is and Walmart having to hike its wages to compete. “There are just very different stories for different sectors, and the sectors that employ more people have the more rosy outlook right now,” Bunker said.
Heather Boushey, a member of the White House Council of Economic Advisers who literally laughed at me when I asked her if the economy was good (and obviously is a little biased here), said that it’s hard to look at a 3.4 percent unemployment rate and “not think that is a good, strong labor market.” She added that 12 million jobs had been added to the economy under President Joe Biden and pointed to 10 million small business applications as well. She said that tech and media workers losing their jobs are “very important” but also “very online,” and drew attention to the gains being made by workers on the lower end of the income spectrum. “The extent to which we are seeing job creation across these United States, and the extent to which we are seeing it for low- and moderate-wage workers, I think that bodes well moving forward,” she said.
Inflation has eaten into wage gains, and in many cases, the raises workers have gotten have been diminished, if not wiped out altogether, by price increases. But many people at the bottom of the income spectrum have seen real wage gains even with inflation, said Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute, a progressive think tank. The landscape is starting to get better as some inflation comes down, though not for everyone. “Wage increases increased a lot more generally in the bottom third paid occupations,” he said.
At the same time, part of the goal here on the Fed’s part is for wage growth to cool across the board, which recent jobs reports, including the one from January, suggest is happening. Employment costs rose slower than expected at the end of 2022, too. It feels odd to say, but to a certain extent, if you are worried about the central bank pushing the country into recession, wage growth slowing could be sort of good. “This is a question of what is the Fed going to lean on to understand the impact of the labor on inflation,” Bunker said.
If the Fed looks at slowing wage growth and thinks the economy’s starting to settle down, maybe it eases up on interest rate hikes and puts the country onto the path of a soft landing, meaning no recession. If the Fed looks at the unemployment rate and decides it’s too low and needs to go up, it might get more aggressive on rate hikes and tip the economy into recession. “We might be back in the ‘good news is bad news’ story, which oh boy, everything’s great right now, that means the Fed is not going to just take away the punchbowl but take the punchbowl away and dump it onto everyone’s heads,” Bunker said.
Mabud said she worries about what she calls Fed Chair Jerome Powell’s “war on workers” and noted the unemployment rate is still at 5.4 percent for Black workers, nearly double the 3.1 percent rate it was at for white workers. “We should set the bar higher, we should set our standards higher, at this moment,” she said. “It’s abundantly clear that you don’t need massive levels of unemployment in order to have lower prices.”
Inflation has been cooling off from its 2022 highs in recent months, but it’s still well above the Fed’s 2 percent target. The consumer price index rose by 6.5 percent annually in December, which remains above where it was pre-pandemic. The implications of that are twofold: first, inflation is still a drag on the economy, and second, what the Fed continues to do to handle it could be an even bigger one.
“Right now, the economy is very healthy except for the high inflation and response, and the real question is, what does the inflationary environment and the effects of the response, higher interest rates, etc., mean over the next year?” Goldwein said.
There have been plenty of calls for the Fed to pull its foot from the brake on interest rate increases. In early February, the Fed raised rates by a smaller amount than it has in other instances over the past year but indicated it still sees “ongoing” increases going forward. Some economists noted Powell has sounded a little sunnier lately than in the more recent past.
The pessimistic case here — and one a lot of smart people are making — is that it inevitably will cause an economic downturn. The optimistic case is that it cools things off and things keep humming along.
No one I spoke to was willing to take the possibility of a recession in the near term off the table; no one thought a recession was a foregone conclusion, either.
“With inflation as high as it was and as stubborn as it was, people worried the Fed was going to cause a recession, but it seems a lot less likely that they have to, and it seems a lot more like a choice now,” Konczal said, explaining this is a shift from where we were. “There was a period last summer where it was taking a lot longer for inflation to start to break than people had anticipated.”
“A recession is not here, it’s not inevitable,” Sahm said. “You can tell the story of a recession later this year, and you can tell the story of we avoid one.”
There is no doubt a litany of reasons to feel anxious about the economy. Rising inflation, even getting better, is still a problem. If you are trying to buy a house right now, you really are in a pickle. Rising interest rates make it expensive to borrow. All this talk of a recession is understandably making people nervous and causing some consumers to pull back. The number of layoffs happening right now might not be a huge part of the workforce, but they could be contagious, and if things turn, they could turn fast.
That being said — and not to sound Pollyannaish here — it’s not the worst thing in the world to take some reprieve from the economic doom and gloom. For all the attention on downside risk, why not consider at least the possibility of upside risk, too?
“What are the odds the Fed underdoes it? That could happen. Or what are the odds that the economy doesn’t have trade-offs quite as harsh as you think?” Wolfers said. “It’s hard to be confident of anything, and if it’s hard to be confident of anything, we could get good news.”