“People and companies create their own self-fulfilling prophecy: you expect the worst, you end up creating the worst,” Shamie said. “I laugh because sometimes I sit with some friends and talk about how bad it is. And I say, ‘We’re at a wonderful restaurant and we’re spending tons of money.’ I look left and right and say, ‘Ah, things don’t look so bad. And yet you complain.”
Layoffs in the tech sector point to a slowing economy, but not yet a recession
This same divide permeates the entire economy as people prepare for a looming recession—but don’t yet feel it in their daily lives. The prevailing view among economists and Fed watchers is that the country is headed for recession. And pundits have good reason for the doom and gloom: The Fed is in the middle an all-out effort to lower dangerously high inflation, raising interest rates at the most aggressive pace in decades. On Wednesday, Federal Reserve Chairman Jerome H. Powell will speak at the Brookings Institution, where he is expected to lay the groundwork for smaller rate hikes in the coming weeks and months, while reinforcing the Fed’s commitment to taming inflation.
But the recession we fear is still there he didn’t arrive. Since the Fed began aggressively raising interest rates in March, key pillars of the economy have remained remarkably strong. The economy grew in the third quarter after contracting in the first half of the year. Gas prices are falling. Companies are still eagerly recruiting workers. And for many businesses and households planning for the future, a slowdown just doesn’t seem imminent.
Powell and his colleagues say they will be guided by economic data, and this week will offer plenty to analyze. New government jobs figures for October are out on Wednesday, with November jobs reports on Friday. But for months, the Fed’s high-profile message has made clear that officials won’t stop until prices return to normal levels, and as a result, the chances of avoiding a recession are shrinking.
“With baseline growth that is only modest growth this year and next, negative shocks in the global economy or our economy could clearly push us into a recession,” New York Fed President John Williams told reporters on Monday. “I hope that is not the case. But this is an obvious risk given all the uncertainty in the global economic outlook.”
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For now, however, observers see growing reasons to hope that a painful recession may not occur.
Last week, the Organization for Economic Co-operation and Development, an international group, said the global economy should avoid recession next year, although European economies will still slow significantly as Russia’s invasion of Ukraine continues to cause energy prices to soar.
Earlier this month, Goldman Sachs’ chief economist put the likelihood of a U.S. recession in the next year at 35 percent — well below previous forecasts. The thinking is that growth will slow but remain positive; the labor market could avoid mass redundancies; wage growth could moderate; and inflation could be on its way to more normal levels.
“We still see a very likely, non-recessionary four-step path from a high-inflation economy today to a low-inflation economy in the future,” Goldman’s Jan Hatzius wrote in an analyst note.
The labor market and consumer spending have yet to fall despite the Fed’s rate hikes. Employers added 261,000 jobs in October, a drop after growing like a thug in the first half of the year, but still showing overall strength. Employers are still looking to hire: The number of job openings rose to 10.7 million in September from a month earlier.
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Consumer spending — which typically accounts for 70 percent of economic activity — is also strong as the holiday season gets underway. Retail sales rose sharply in October, according to the Commerce Department. Buyers are paying higher prices for essentials such as fuel and food. But they also continue to spend on items such as cars, furniture and dining out. Consumer sentiment has also improved from a steep drop in the summer when gas prices topped $5 a gallon. Prices at the pump have been steadily falling, and the national average on Monday was $3.54 a gallon, according to AAA — down more than 10 cents a gallon from last week, but still higher than this time last year, before the Ukraine war.
Corporate earnings calls also turned more optimistic. According to a FactSet survey released Nov. 18, the number of S&P 500 companies citing the term “recession” in their third-quarter earnings announcements fell 26 percent from the second quarter.
Of course, not all parts of the economy were spared, and we will feel the full weight of interest rate hikes here and abroad only next year. But the housing market quickly responded. Buyer demand has slowed significantly as mortgage rates have risen, helping prices fall when “Sold” signs are still around. Silicon Valley has also been hit by waves of layoffs and hiring freezes, including big names like Meta and Amazon (whose founder Jeff Bezos owns The Washington Post).
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No one doubts the pain high inflation has caused to people’s budgets and the disproportionate impact felt by lower income households. More people are turning to retirement savings for cash, according to new research from Vanguard. Fiona Greig, Vanguard’s global head of investor research and policy, wrote last week that the recent increase in the number of households drawing down their employer-sponsored retirement accounts “may be a sign of the deteriorating financial health of the American consumer.”
Still, some economists and policymakers say there’s a difference between how badly people perceive the economy and how they respond. Curtis Dubay, chief economist at the U.S. Chamber of Commerce, pointed to a paradox called “second-hand pessimism,” when people resent the economy but don’t change their behavior.
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“Companies and consumers sense that the economy is slowing or not in good shape, but their actions are not keeping up,” Dubay said. “Consumers continue to spend … On the business side, they’re saying, ‘The economy is bad and it’s going to get worse, but our specific situation is good.’ “
Inflation can explain this gap. High prices and the central bank’s struggle to tame them bring an inevitable amount of uncertainty for families and the broader economy, said Mary Daly, president of the San Francisco Fed.
Daly said that as she travels around her district — which spans nine western states and is the Fed’s largest district both geographically and by the size of its economy — she hears that “people feel different than the situation they fear. , or that they even see out there.” For example, a company may have found creative ways to get margins, but knows others who can’t.
“[Inflation] it’s creating this sense of anxiety that the economy could topple at any time because somebody knows it’s unsustainable,” Daly told reporters last week. “As the Fed works to lower it, that creates uncertainty.”
“We are in a time of high uncertainty, which will add to that sense of foreboding,” Daly added.
Americans feel anxious. A closely watched survey of consumers released this month by the University of Michigan found that, in addition to the continued impact of inflation, consumer attitudes “were weighed down by rising borrowing costs, declining asset values and weakening labor market expectations.”
For now, Shamie of Delta Children remains optimistic. He knows the economy can turn around quickly. Parents may need to reconsider a new playset if inflation continues to rise or if the economy suddenly slows down. But for now, he’s sticking to his plans.
“There are real problems, obviously existing problems,” Shamie said. “But I think people tend to pull back — lay people off, lay people off, cut costs. And then it all comes back to their business because the whole economy ends up shaking.”