Prakash Kolli, Wealth of Geeks
Billionaire hedge fund titans keep predicting a recession in 2023. But the United States economy keeps chugging along with near record-low unemployment, so far avoiding such a dire consequence.
Jobs are easy to find, despite headlines about layoffs.
The unemployment rate was 3.4% in January and April 2023, the lowest in 54 years. It has since come up slightly to 3.7%, but that value is still minimal. Moreover, the number of job openings is over 10 million. That’s down from the peak in 2022 but still an abnormally high number. In 2019, the year before the pandemic, the number of available positions ranged from 7 to 7.5 million.
Although some rich investors and economists may think otherwise, the unemployment rate and job opening numbers suggest America may not be bound for a recession after all.
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The U.S. economy keeps creating jobs
Just a short time ago, in January 2021, the unemployment rate was 6.3%. Going back even further, it was nearly 15% in April 2020, during the COVID-19 pandemic, the highest on record. In a few weeks, the U.S. economy erased almost 20 million jobs and plunged into a recession.
However, in a little more than three years’ time, America reversed the pandemic job losses and gained millions of jobs. In fact, the total number of jobs now exceeds the peak before the pandemic.
Many industries have recovered and grown dramatically. For example, the U.S. Bureau of Labor Statistics shows professional and business services gaining 1,616,000 jobs between February 2020 and May 2023. Other industries with considerable job growth include transportation and warehousing, private education and health services, construction, manufacturing, and information.
On the other hand, the job categories of leisure and hospitality, as well as government, are still shy of hundreds of thousands of positions compared to before the pandemic.
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Americans are pessimistic
Why are Americans pessimistic if job growth is so robust and unemployment so low? The two answers are inflation and higher interest rates.
• Inflation
Almost everyone understands inflation; the item you bought yesterday increases in price because the cost to produce the thing rises. For example, eggs are more expensive today than before the pandemic because feed, labor, freight, and packaging costs have grown.
Supply and demand also affect the price of eggs. The supply of egg-laying chickens has fallen, driving egg prices higher. Chickens and other poultry are periodically affected by bird flu, causing the industry to cull millions of birds, especially in states like Iowa, Nebraska, and Colorado, reducing supply in 2023.
The result is higher egg prices that have nearly doubled in the past two years. In addition, the effect multiplies because eggs are an ingredient in many other packaged food items.
A similar inflationary dynamic exists for many other items, sending their prices higher too. Consequently, Americans are paying more for almost everything. However, their salaries are not increasing at the same pace, causing a general feeling of unhappiness.
• Interest Rates
The United States Federal Reserve has repeatedly and assertively raised the Federal Funds Rate to combat high inflation. As a result, interest rates have risen quickly, starting in early 2022 through the present. The Federal Funds Rate affects businesses and consumers alike because of its impact on mortgage, credit card, auto, and commercial interest rates.
Although inflation has come down from its peak in June 2022, the sustained high interest rates are making Americans pessimistic. But they should expect more increases because the Fed has been ambiguous about stopping or reversing course.
When discussing future policy action, the Federal Reserve Chairman Jerome Powell stated at the May meeting press conference, “We will make that determination meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation.”
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Borrowing money is more expensive
Buying a home is now more expensive because mortgage rates have climbed, more than doubling since late 2021. For instance, the 30-year fixed rate mortgage is now 6.71% compared to ~3.1% in December 2021. Monthly mortgage payments have risen drastically. A once affordable house is now out of reach.
The same trend has occurred for auto loans, credit card payments, and business loans. Banks loaned billions of dollars to commercial real estate developers at low-interest rates. Some buildings are not fully occupied because of hybrid work, and interest payments are increasing. Projects that may have been profitable before may be losing money now, making businesses wary.
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The stock market is bullish
Despite the general malaise of American consumers and businesses, the stock market bulls have returned. The Nasdaq is up more than 26% year-to-date. Stocks like Apple, Microsoft, Nvidia, Meta Platforms, and Tesla have powered a bull market for tech stocks. The narrower Nasdaq-100, comprised of the 100 largest non-financial companies by market capitalization, has risen even more at 32%+.
Other indices are not performing as well, but they have positive returns too. The S&P 500 Index has climbed 12.3% in 2023 and is more 20%+ above its low in October 2022. The Russell 2000 and the Dow Jones Industrials Average (DJIA) have positive returns but in smaller percentages.
A bullish stock market is often an indicator of optimism. In this case, Wall Street traders may expect inflation to decline below the Federal Reserve’s target of 2% and interest rate increases to stop. Lower inflation and stable rates will provide predictability for American businesses and consumers. In turn, they may become more optimistic.
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A recession may not occur
A recession may occur in the United States because of inflation and higher interest rates, and some billionaire hedge fund managers are predicting one. However, recessions usually mean negative readings for the Gross Domestic Product (GDP) and significantly greater job losses. But the unemployment rate remains near 3.5%, and jobs are plentiful. These metrics are not signs of a recession.
