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Are we facing a ‘wealth-driven recession’ or a ‘sector-by-sector slowdown’? Or could it be no recession at all?

by Sophia Chen
6 comments
US economy resilience

Speculations have been around for more than a year: An economic downturn is on the horizon for the United States. Maybe this quarter, maybe the next, or the one after that. Or perhaps the following year.

So, is a recession still a looming threat?

The recent indications suggest maybe not. Despite the increased burden of borrowing due to the Federal Reserve’s bold series of interest rate hikes, consumer expenditure remains strong and employers continue to recruit. Decreased gasoline prices and stabilized grocery costs have bolstered Americans’ purchasing power.

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Continued growth is observed in the economy. Alongside, some economists are starting to believe that the United States might actually pull off the elusive “soft landing”, where growth decelerates but consumption by households and businesses remains sufficient to fend off a full-blown recession.

“The U.S. economy is truly demonstrating resilience,” said Gregory Daco, Chief Economist at EY, a tax and consulting firm. “This is leading many to rightfully question whether the much-anticipated recession is truly unavoidable or whether a soft-landing of the economy” is feasible.

Analysts highlight two trends that could potentially avert an economic contraction. Some believe the economy is undergoing a “sector-by-sector slowdown”, where only certain industries decline while the overall economy stays afloat.

Others propose the concept of a “wealth-driven recession”, noting that major layoffs have primarily occurred in high-paying industries such as technology and finance, sectors that predominantly employ professionals who typically have the financial resilience to weather job losses. As a result, these job cuts are less likely to drag down the overall economy.

However, challenges still exist: The Federal Reserve is almost guaranteed to persist with rate hikes, at least once more, and maintain them high for several months, thus continuing to levy hefty borrowing costs on consumers and businesses. Hence, some economists warn that a full-scale recession might still transpire.

“The Fed will continue its efforts until it resolves the inflation issue,” stated Yelena Shulyatyeva, an economist at BNP Paribas.

Let’s see how this could potentially unfold:

IT’S A SECTOR-BY-SECTOR SLOWDOWN

When various segments of the economy contract alternately, with some shrinking while others continue to grow, it’s often termed a “sector-by-sector slowdown”. The economy, on the whole, manages to dodge a full-blown recession.

First to suffer a downward spiral was the housing industry after the Federal Reserve initiated a steep rise in interest rates 15 months ago. With mortgage rates almost doubling, home sales plummeted and are now 20% lower than they were a year ago. Manufacturing followed suit. Even though it didn’t bear the brunt as heavily as housing, factory output is down 0.3% from a year prior.

The tech industry also encountered a downturn this spring. As Americans began to spend less time online post-pandemic, opting for shopping at physical stores and frequenting restaurants, tech giants like Facebook’s parent Meta, video conferencing provider Zoom and Google had to make significant job cuts.

Concurrently, consumers boosted their spending on travel and entertainment, fortifying the economy’s vast service sector and compensating for the struggles in other sectors. Economists predict such spending to decelerate later this year as households’ savings accumulated during the pandemic continue to dwindle.

However, by then, the housing sector might have recovered enough to propel economic growth. Already, there are indications of the industry starting to bounce back: Sales of new homes surged by 12% from April to May despite high mortgage rates and home prices soaring above pre-pandemic levels.

Other sectors should continue to grow, establishing a base for overall growth. Krishna Guha, an analyst at Evercore ISI, pointed out that some sectors — from education to government to health care — are not significantly impacted by higher interest rates, explaining their ongoing hiring spree.

If the U.S. economy manages a soft landing, Guha said, “these sector-by-sector downturns will play a major role in the narrative.”

IT’S A ‘WEALTH-DRIVEN RECESSION’

Wealthy Americans aren’t exactly struggling, especially with the stock market’s recovery this year. However, it’s also true that the majority of high-profile job losses that started last year have been in higher-paying roles. This trend contrasts with the typical recession pattern where lower-paying jobs in sectors like restaurants and retail are usually the first to go, and often in distressingly large numbers.

In most economic downturns, as Americans start to rein in spending, waves of workers in the restaurant, hotel, and retail sectors are laid off. As fewer people purchase homes, many construction workers lose their jobs. Sales of high-cost manufactured goods, such as cars and appliances, tend to decline, resulting in factory job losses.

This time, the pattern seems to be different. Restaurants, bars, and hotels are still recruiting — in fact, they have been a significant source of job growth. Surprisingly, despite higher borrowing rates that usually discourage residential and commercial building, construction firms are still expanding their workforce.

In contrast, layoffs have been primarily hitting white-collar and professional jobs. Uber Technologies announced last week that it would cut 200 of its recruiters. Earlier this month, GrubHub announced 400 layoffs among the delivery company’s corporate jobs. Financial and media companies are also grappling, with Citibank announcing this month that it will have reduced its workforce by 1,600 workers in the April-June quarter.

Many of the affected employees are well-educated and likely to secure new jobs relatively swiftly, economists suggest, helping to keep unemployment low despite the layoffs. At present, for example, the federal government, hotel, retail and even railroad industries are looking to recruit people laid off from tech giants.

Tom Barkin, president of the Federal Reserve Bank of Richmond, pointed out that affluent workers generally have savings to fall back on after losing a job, enabling them to continue spending and stimulating the economy. Therefore, Barkin suggested, white-collar job losses don’t tend to impact consumer spending as heavily as job losses among blue-collar workers.

“This might indicate a distinct kind of softening labor market…that has a different impact, both on demand and on aspects like the unemployment rate compared to the usual weakening,” Barkin stated in an interview with The Big Big News last month.

OR PERHAPS NO RECESSION

The more optimistic economists are increasingly hopeful that a recession can be prevented, even if the Fed sustains peak interest rates for several months.

They note that a variety of recent economic data has surpassed expectations. Most notably, hiring has remained surprisingly strong, with employers adding an impressive average of around 300,000 jobs over the last six months and the unemployment rate, at 3.7%, is still near a half-century low.

Manufacturing has also defied pessimistic forecasts. On Tuesday, the government reported that last month saw an increase in companies’ orders of industrial machinery, railcars, computers and other durable goods.

Many analysts are reassured because some perceived threats to the economy turned out to be less detrimental than anticipated — or haven’t emerged at all. The Congress dispute, for instance, over the government’s borrowing limit, which could have prompted a default on Treasury securities, was resolved without significant disruption in financial markets or noticeable impact on the economy.

Up to now, the banking turmoil following Silicon Valley Bank’s collapse last spring appears to have been largely contained and doesn’t seem to be harming the economy.

Jan Hatzius, chief economist at Goldman Sachs, stated this month that the reduction of such threats led him to lower the likelihood of a recession within the next 12 months from 35% to just 25%.

Other economists highlight that the economy doesn’t confront the types of dangerous imbalances or events that have sparked some recent recessions, such as the stock market bubble in 2001 or the housing bubble in 2008.

“The chance of a recession is decreasing quickly,” said Neil Dutta, an economist at Renaissance Macro. Whether we are experiencing a rolling recession or “wealth-driven recession,” he said, “If you need to coin different terms, it’s not a recession.”

Frequently Asked Questions (FAQs) about US Recession Possibilities

What is the current state of the US economy according to the article?

According to the article, despite warnings of an impending recession, the US economy has demonstrated resilience. Even with higher borrowing costs due to the Federal Reserve’s aggressive streak of interest rate hikes, consumers continue spending, and employers are still hiring. Some sectors are experiencing downturns, but overall economic growth continues.

What are the two trends analysts suggest may stave off an economic contraction?

Analysts suggest that two trends may help avoid an economic contraction. Some believe the economy is experiencing a “rolling recession,” where only certain industries shrink while the overall economy stays afloat. Others think the US is undergoing a “richcession,” where major job cuts are concentrated in higher-paying industries like technology and finance.

What is a “rolling recession”?

A “rolling recession” is when different sectors of the economy contract at different times. Some sectors decline while others continue to expand, allowing the overall economy to avoid a full-blown recession.

What is a “richcession”?

A “richcession” is when major job cuts are concentrated in higher-paying industries, like technology and finance. These job cuts are less likely to sink the overall economy because professionals in these fields generally have the financial resources to withstand layoffs.

What is the most optimistic outlook for the US economy?

The most optimistic outlook suggests that a recession might be avoided entirely, even if the Federal Reserve keeps interest rates at a peak for months. This view is based on a range of recent economic data that has come in better than expected, indicating resilience in sectors like manufacturing and steady job growth.

More about US Recession Possibilities

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6 comments

TechGuru123 June 28, 2023 - 11:58 pm

layoff’s in the tech sector are worrisome, hope it balances out soon.

Reply
Jenn_TheEconomist June 29, 2023 - 12:14 am

The idea of a rolling recession is fascinating. Could be a whole new way of looking at economic trends!

Reply
MikeJohnson88 June 29, 2023 - 1:27 am

wow, really deep analysis here. didn’t know about the richcession concept. Makes u think, huh?

Reply
LindaAtHome June 29, 2023 - 2:11 am

I just hope we don’t hit a full blown recession. fingers crossed.

Reply
FedWatcher June 29, 2023 - 6:04 am

Interesting how the fed’s rate hikes play into this, need to follow closely.

Reply
EcoWarrior June 29, 2023 - 9:31 am

Maybe the economy’s bouncing back. it’s about time after the pandemic hit us hard.

Reply

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