In what can only be described as a stunning turn of events, the case for a 2023 recession in the American economy is crumbling. Many CEOs, investors, and economists had predicted a downturn, anticipating that the Federal Reserve’s efforts to control inflation would effectively bring the economy to a grinding halt.
The expectation was that businesses would lay off workers, and cautious Americans would tighten their purse strings. However, the undeniable strength of America’s jobs market is undermining these forecasts.
Surprisingly, hiring has not only remained steady but has accelerated once again. In May, employers added a remarkable 339,000 jobs, surpassing the expectations of major forecasters. This figure is not only higher than anticipated but also exceeds the number of jobs added in any single month of the exceptionally robust 2019 job market.
Mark Zandi, chief economist at Moody’s Analytics, expressed his astonishment at the resilience of the economy. Despite various challenges such as the banking crisis, rate hikes, and the debt ceiling, Zandi believes that a recession in 2023 is becoming increasingly unlikely. “This economy is incredibly resilient, despite all the slings and arrows,” he told CNN in a recent phone interview. “For this year, given these jobs numbers, it’s hard to see a recession.
Increasingly, the odds of a recession this year are fading. A lot of economists who have called for a recession are now in the uncomfortable position of pushing back the start date.”
For a recession to materialize this year, the economy, and particularly the jobs market, would have to deteriorate rapidly. Justin Wolfers, an economics professor at the University of Michigan, noted, “We’ve never had a recession when the labor market was running this hot. In fact, it would be absurd to use the ‘r-word’ at a time when we’re creating jobs at this rate.”
The recent jobs report provided additional evidence contradicting the notion of an imminent recession. In addition to the impressive 339,000 jobs added in May, the Bureau of Labor Statistics also revised the job growth figures for March and April, significantly increasing the previously reported numbers.
Last fall, Bank of America had even warned of shrinking payrolls and substantial job losses for the first quarter of 2023. However, the current data prove those predictions wrong.
While some companies, particularly in the tech and media sectors, are cutting jobs, the overall economic indicators suggest that those laid off are quickly finding new employment opportunities. The household survey presented conflicting signals, with the unemployment rate jumping by 0.3 percentage points, the highest increase since April 2020.
However, the three-month moving average for unemployment remains extremely low at 3.5%, leading experts to describe the jobs market as “really freaking good.”
Despite the positive outlook, it is important to acknowledge the potential for change in the coming months. There is a significant medium-term risk of a recession, especially as consumers grapple with the financial strain caused by two years of high inflation.
Companies like Dollar General and Macy’s have already adjusted their forecasts due to slowing customer demand. Additionally, rising auto loan delinquencies indicate a growing financial burden on consumers.
Moreover, the lagging effects of the Federal Reserve’s aggressive interest rate hikes raise concerns about potential overreach and its impact on the economy.
While economist Mark Zandi estimates a one-in-three chance of a recession this year, he believes the odds of a recession in 2024 rise to “uncomfortably high” at 50/50.
However, based on the latest jobs reports, there is no immediate indication of an ongoing or imminent recession. As long as the economy continues to produce over 200,000 jobs per month, a recession is unlikely.
Morgan Stanley supports this perspective, suggesting that the May jobs report points to a soft landing for the economy, indicating that the Fed can raise rates without triggering a recession. The risk of a hard landing appears remote, according to University of Michigan professor Justin Wolfers.
The continued strength of the jobs market may present an alternative scenario. In this scenario, the economy overgrows and the Fed must apply even stronger measures to slow it down, risking a recession. However, this would take time to unfold, making it a problem for 2024 rather than the anticipated 2023 downturn.