How a mild recession could benefit the average American
The past few years certainly haven’t been easy for everyday Americans.
As prices soared, Americans struggled to afford basic products. And the threat of an impending recession kept many up at night worrying about losing their jobs.
The good news is that recent data should help ease both worries.
In July, inflation figures came in lower than expected. The Consumer Price Index (CPI)—the broadest measure of inflation — rose just 3.2% on the year.
That’s still higher than the Fed’s 2% target, but much lower than last year when inflation peaked above 9%.
Slowing inflation is a big deal because it makes the Fed think twice about raising rates further.
Jan Hatzius, the chief economist at Goldman Sachs, agrees. “There’s really no reason for them to deliver more tightening at this point. It makes a lot of sense to stay on hold for potentially quite a long time.”
And if the Fed doesn’t have to keep hiking interest rates, there’s less of a chance they’ll cause a severe economic crunch.
So far, 11 rate hikes in 12 meetings haven’t tipped the economy into recession. But there’s only so much more that the indebted working class can take before rates eat into their spending power.
All this points to two great pieces of news for average Americans: potentially fewer eyebrow-raising bills at the grocery store and a lower risk of getting fired.
Inflation is finally cooling
Over the past few years, spiraling inflation raised the price of many basic goods. At one point in 2022, food prices were more than 13% higher than they were a year earlier.
Fortunately, that trend is starting to reverse. In July, food prices were just 3.6% higher than the year before.
Falling inflation doesn’t mean prices will stop rising. Even at the Fed’s target, prices would rise about 2% a year.
But inflation becomes a problem when prices are rising faster than wages. And falling inflation makes it much easier for consumers to keep up with living costs.
Based on the latest economic data, the drop in inflation is likely to be sustained.
The unemployment rate ticked up to 3.8% in August, driven by more people looking for work.In technical terms, “participation” in the economy increased, meaning there’s more competition for jobs.
And that’s good news for the inflation picture, because high wages can cause businesses to increase prices.
Rubeela Farooqi, the chief U.S. economist for High Frequency Economics, agrees with this assessment. “A slowing in wage pressures and rising participation are encouraging, confirming some softening in labor market conditions, in line with what Fed officials want to see.”
In another sign that the worst of inflation is behind us, in a recent survey just 21% of small businesses said inflation was their biggest concern.
That’s the lowest level since November 2022.
A severe recession is less likely
The slowing economy is a double-edged sword.
On the one hand, it’s helping the average grocery bill by lowering inflation. On the other hand, it increases the chance of a recession.
But the fact is, a modest recession could be the best path forward for the U.S. economy.
That’s because it would eliminate the need for any further rate hikes that could cause a severe recession with high unemployment.
Blerina Uruçi, the chief U.S. economist at T. Rowe Price, says that a moderately cooling economy is exactly what’s needed to avoid serious unemployment.
“It almost feels like the Fed can have its cake and eat it too, lowering inflation without causing too much damage in the labor market.”
And Fed officials are paying attention. In public statements, they’re less likely to support further rate hikes.
At a recent event, Dallas Fed president Lorie Logan noted that even though inflation hasn’t fully been squashed, tools other than rate hikes might be appropriate to finish the job.
“I’m not yet convinced that we’ve extinguished excess inflation,” she said. “But in today’s complex economic environment, returning inflation to 2% will require a carefully calibrated approach — not endless buckets of cold water.”
The scenario under which the American economy returns to 2% inflation without experiencing a severe recession is known by many names, including a “soft landing” or a “goldilocks economy.”
But whatever you want to call it, the odds of it happening are getting better.
Good news is bad, and bad news is good?
Much will depend on how future economic data plays out.
Under ordinary circumstances, a growing economy and higher employment are good for the nation. But in an inflationary environment, good news isn’t always so good.
For starters, even though the decline in inflation appears sustained, the economy could come roaring back to life. There are already signs that’s happening.
President Biden has unleashed trillions in federal spending to rejuvenate manufacturing and fight climate change. This has led to a generational surge in private sector infrastructure spending that’s expected to create thousands of jobs.
Bidenomics may be costly down the road, but right now, it’s leading to a manufacturing boom.
The Atlanta Fed predicts third quarter GDP will grow 5.6%—an astoundingly high figure.
Before Covid, these numbers would have been cheered by everyone. After the inflation scare, economists worry that excessive growth could lead to further price growth.
In the meantime, there’s reason to be optimistic that grocery bills are coming back down to earth. If the Fed really knows what it’s doing, a soft landing for the economy is a real possibility.