Why the Recession Still Isn’t Here

Hiring and Wages are Up, Reinforcing the Economy’s Resilience.

t’s the expansion that keeps defying expectations, thanks to steady hiring and strong spending. But don’t get too comfortable.

Of course, just because everyone who predicted a recession has been wrong doesn’t mean they won’t eventually be right. Though the unemployment rate remains low, it’s risen from its postpandemic extremes: The unemployment rate ticked up to 4.0% last month from 3.9% in April. It was as low as 3.4% in April 2023.

Already, the rate at which companies hire workers has fallen to levels last seen seven years ago. Job vacancies, which soared during the pandemic, have returned to prepandemic levels; if they fall much lower, a higher unemployment rate beckons.

So far, labor market imbalances have resolved themselves without a recession.

If the economy is a mountain climber on a ridge, “there are times when that ridge is extremely broad and even a major event isn’t going to knock the economy off the ridge,” said Glenn Kelman, chief executive of real-estate brokerage Redfin.

Now, “it feels like the ridge has gotten much narrower,” he said.

Businesses aren’t shedding workers, though pressures to do so will mount if a longer period of higher rates erodes margins and profits slump. Fed officials are set to hold interest rates steady at their two-day meeting next week.

The Fed is trying to balance the risk of cutting too soon and allowing stubborn inflation to persist with the hazard of keeping rates too high and triggering a slowdown that may not be needed to finish their inflation fight.

The extremely unusual nature of the pandemic-induced economic downturn four years ago and the aggressive policy response that followed lie at the root of any explanation for the American economy’s remarkable resilience to date.

By the time the Fed started raising rates, private-sector balance sheets were abnormally strong. Many households and businesses had recently locked in ultralow borrowing costs after the Fed pushed rates down in 2020 and 2021, shielding them from the ensuing hikes.

This time, economic activity has been supported more by wealth and incomes than by credit. The pandemic altered spending habits which, together with higher asset prices, solid job prospects and government stimulus, left more households feeling flush.

On the other hand, low-income consumers have depleted pandemic-era savings cushions and have turned to borrowing on credit cards. They’re falling behind on payments at higher rates, and discount retailers are reporting that demand is weakening.

Strong job growth has lasted for longer than anticipated because some sectors are still trying to catch up to prepandemic levels of employment. For example, the leisure and hospitality sector added 1.3 million jobs over the last two years but is still around 1 million jobs below its long-run trend.

Compared with Europe, the U.S. has witnessed a bigger decline in business bankruptcies and a much larger jump in new business formation, which has also boosted job growth. New business registrations at the end of last year were up 53% from four years earlier in the U.S., compared with 8% in Europe, according to Fed research.

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