Oscar L. from Lockhart, TX asks: Hello Mitch, I’m a bit confused by where the economy stands right now. Everyone says a recession is coming or we’re in one, but then on the other hand the unemployment rate keeps going down. What’s the real story here?
Mitch’s Response:
Thanks for writing. I can assure you that even some of the top economists across the country are just as confused as you are about the actual state of the economy. Case-in-point: the research firm Refinitiv surveyed 81 economists for January 2023 job growth projections, and the consensus was that ~185,000 new jobs would be added.1
The actual number: 517,000!
Federal Reserve Chairman Jerome Powell and other Fed governors were also taken aback by the news. The president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, remarked that the jobs number “surprised all of us” and Fed Chairman Powell said that “this cycle is different from other cycles…It has just confounded all sorts of attempts to predict.”
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Aggressive rate hikes are meant to push up borrowing costs, slow investment and growth, and almost force companies to cut back on hiring and wage increases. The effects of higher rates have certainly been felt in areas like housing and in the technology sector where growth happened too quickly in the years following the pandemic. But elsewhere, the economy has remained more resilient than most expected, and companies are desperate to keep and hire workers. The unemployment rate has gone down during this financial tightening period, not up.
The Fed is worried that too-little-slack in the labor market will eventually emerge as an inflation problem, but the signs to date suggest wage pressures are also getting better, not worse. For Q4, the Labor Department reported that employers spent 1% more on wages and benefits than they did in Q3, which was an improvement from the previous quarter’s 1.2% pace.3 On an annualized basis, wages and benefits grew by 4% in the fourth quarter, which is a marked improvement from the peak 5.8% pace set earlier in 2022. 4% wage growth is not compatible with the Fed’s 2% average inflation target, but it is undeniable that the rate of growth is heading in the right direction.
What does this all mean for the ‘real story’ in the economy? In my view, it’s that a recession – if one were to occur – would be so mild that many people wouldn’t even notice it. Traditional signs that a recession is looming – like the inverted yield curve, weak readings in manufacturing and industrial production, and the Conference Board’s Leading Economic Index – all suggest that the economy is poised to slow. But it’s also true that consumer spending makes up about two-thirds of total economic output, and as long as everyone who wants a job has one, I don’t foresee a cliff in spending – which also means I don’t foresee a deep recession.
There is no way to know exactly when or if a recession will occur, but you can prepare for one.
It’s important to understand how recessions work, how long they last, and how to potentially protect yourself and your family from long-term damage to your assets and security. We can help you with our free guide, A Recession is Coming: 6 Insights to Know Now So You’re Prepared.4
If you have $500,000 or more to invest, get our free guide today. You’ll learn the scope and impact of recessions, and get our viewpoint on the most important moves you can make to weather this one. Don’t wait—get this guide today!
Disclosure