Is U.S.’s recession finally approaching an end?

The U.S. economy has faced a major yet bleak recession in recent times. Inflation has hit a four-decade high, consumer spending has severely weakened, and interest rates have surged drastically. Most economists have pointed out a recession in 2023.

Economists have yet to rule out the concept of an economic downturn. However, in recent weeks, inflation has shown a widespread symptom of ease, making us declare that a recession may not be inevitable.

One reason for the optimism toward recession is an acceleration in U.S. wages. The decision has benefitted the workers but proved to slow down the increased inflation.

Federal Reserve Chairman Jerome Powell has frequently highlighted the fast-rising working pay to explain why the Federal reserve has rapidly increased the interest rates. If the fed rate increase continues for a long duration, it can, in turn, weaken the economy to result in a severe recession.

The government is expected to issue another mild report on Thursday regarding inflation which would strengthen the hopes that the Federal Reserve might decide to bring a halt to the interest rate increase sooner than it has been expected.

On the other hand, the job market, which is the most crucial pillar of the economy, remains remarkably strong.

This has implied that the Fed may manage to land on a soft plot followed by the slow down of the economy and reverse, and the unemployment rate increase has stayed relatively low.

The situation would prove to be harsh for many people. But, it would not cause diverse unemployment mainly attributable to the recession.

Alan Blinder working as an economist at Princeton University who has formerly served as the Vice-chair of the Federal Reserve, has mentioned that all the symptoms imply a higher probability of a soft landing. However, the chances may not be more than 50-50. But the probability is looking better than previously it was. 

One of the significant positive signs that show that the U.S. economy is not currently in a recession is the ongoing slowdown in the rate of inflation, as said by Blinder. The rate of inflation has dropped from 9.1 percent in June to a still higher rate of 7.1 percent. 

When the government publishes another inflation report, the people are likely to predict that the slowdown will step to 6.5 percent. At the same time, the prices have remained constant every month from November to December, which is another positive sign. 

The inflation slows down can be attributed to many factors, which include cheaper gas supplies, increasing supply chain businesses, and smaller profit margins among other retailers.

The national price of a gallon of gas which was marked at 3.27 USD on Wednesday, has reached far below the mark of 5 USD in Mid of June. The prices of used cars, which were marked at higher prices, i.e., 37 percent in 2021, have dropped considerably for five straight months.

The prices have fallen by 3 percent from what was recorded in the previous year.

The cost of apparel has declined sharply in two of the three months. At the same time, furniture prices have decreased further for three straight months.

The other important reason is that consumers are spending less, which has forced retailers to provide massive discounts on the price of goods to maintain their inventory of goods.

Online prices have shrunk from year-ago levels in the computer goods, toys and apparel sector as stated by Adobe Analytics.

Binder has mentioned as the sooner the inflation rate declines, the sooner the Fed will ease, and this will significantly decrease the chance of recession.

Threats to U.S.’s ease in recession:

There are many threats to U.S.’s soft landing, and most of it is linked to China’s economy. As China’s economy reopens and it operates in a full-fledged manner, it will have to absorb more of the world’s oil supply. It will further increase gas prices for the country.

Even though layoffs have remained low outside the technology companies, the trend could change its trajectory if businesses slow down on behalf of the economic outlook. 

But keeping the following pointers aside, a soft landing scenario is working out for the U.S. the slowdown in price increase implies that the Fed’s interest rate hikes for seven consecutive times last year had some effect in curbing inflation, although inflation has remained above the 2 percent target.

The officials have clarified that they intend to increase the key rate by at least three-quarters of a point more.

The job market data is very supportive of the idea that the economy can slow down without recession. 

The fact that many employers have reduced the working duration rather than cutting out jobs suggests that they want to retain their employees despite the slowdown in the company. The businesses have faced many shortcomings in hiring workers in the past two years, and now they are more reluctant to let them go. 

Edited by Prakriti Arora