‘Rolling recession’ or ‘richcession’ might avert a full-blown economic slump in the US

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In the face of prolonged predictions of an imminent recession, the US economy is, contrary to expectations, picking up speed.

Despite the Federal Reserve’s significant hike in borrowing costs, the economy’s strength remains evident: consumer spending hasn’t faltered and hiring remains steady. The lowest level of inflation in two years is enhancing Americans’ spending power.

Last Thursday, government estimates showed the economy growing at a decent 2.4% annual rate in the second quarter, up from the 2% rate in the first quarter. This upturn was largely driven by businesses investing heavily in equipment, software, and infrastructure.

The fresh economic outlook aligns with growing hopes for a ‘soft landing,’ where growth decelerates and inflation falls without plunging the economy into a full-fledged recession.

Economists highlight two trends that could prevent an economic downturn.

Some believe the US economy is witnessing a ‘rolling recession,’ where some sectors retract while the overall economy continues to grow.

Another theory is that the US is going through a ‘richcession’: significant job losses have been localized in high-paying industries like tech and finance, sectors with professionals generally able to financially endure layoffs. As a result, these job cuts are less likely to destabilize the whole economy.

However, threats still exist. On Wednesday, the Fed raised its benchmark interest rate to around 5.3%, the highest in over two decades, with the possibility of another hike before year’s end. These higher rates result in significant borrowing costs for consumers and businesses, leading some economists to warn that a full-blown recession could still happen.

“The Fed will continue tightening until it resolves the inflation problem,” says Yelena Shulyatyeva, an economist at BNP Paribas.

The following scenarios could unfold in the US:

ROLLING RECESSION

A ‘rolling recession’ refers to a situation where different sectors of the economy contract at different times, allowing the overall economy to avoid a severe downturn.

The housing industry was the first to feel the effects of the Fed’s steep rate increases a year and a half ago. The near doubling of mortgage rates led to a drop in home sales, now 19% lower than a year ago. Manufacturing followed suit, with factory production now down compared to last year.

Technology was also hit this spring as Americans returned to in-person shopping and dining, leading to layoffs in tech giants like Meta, Zoom, and Google.

However, consumer spending on travel and entertainment, strengthening the enormous service sector, has counterbalanced difficulties in other areas. Economists predict that such spending will decelerate later this year as pandemic-era savings dwindle.

Yet, by then, the housing market might have recovered sufficiently to spur economic growth, while other sectors continue to expand. Krishna Guha, an analyst at Evercore ISI, notes that sectors like education, government, and healthcare are less affected by higher interest rates and should continue to hire.

THE ‘RICHCESSION’ SCENARIO

Despite the stock market’s rally this year, the majority of prominent job losses initiated last year have been in higher-paying professions, diverging from the typical recession pattern where low-paying jobs are the first to go.

In most downturns, consumer spending pullback leads to layoffs in sectors like hospitality and retail. But this time, these sectors continue to hire. Despite higher borrowing rates, construction companies also keep adding workers, confounding experts.

Instead, the layoffs primarily impact white-collar jobs. Uber, GrubHub, Citibank, and Ford Motor Co. have all announced job cuts.

These layoffs tend to affect well-educated workers who are more likely to secure new jobs quickly, helping to keep unemployment rates down. Tom Barkin, president of the Federal Reserve Bank of Richmond, notes that affluent workers usually have savings to cushion job loss, allowing them to continue spending and fueling the economy.

MIGHT THERE BE NO RECESSION?

The most hopeful economists are growing increasingly confident that a recession might be avoided, even if the Fed maintains high interest rates for some time.

They highlight a series of recent encouraging economic data, including resilient hiring numbers, with employers adding approximately 300,000 jobs monthly over the past half-year and an unemployment rate of 3.6%, a near 50-year low.

Certain anticipated threats to the economy have been less damaging than feared or have not materialized at all, lending more credence to the possibility of avoiding a recession.

Jan Hatzius, chief economist at Goldman Sachs, has reduced the probability of a recession within the next year from 35% to just 20%.

Other economists argue that the current economy doesn’t face the type of risk factors that have previously triggered recessions, such as the stock market bubble in 2001 or the housing bubble in 2008.

Neil Dutta, an economist at Renaissance Macro, believes, “The risk of recession is rapidly decreasing,” regardless of whether the US is experiencing a rolling recession or a “richcession,” adding, “If you have to give it different names, it’s not a recession.”

Frequently Asked Questions (FAQs) about US economy resilience

More about US economy resilience

• Federal Reserve
• What is a Recession?
• Effects of Interest Rates on Economy
• Understanding Inflation
• US Unemployment Rate