Can America really avoid recession for the second time in a year?

America’s economy is on everyone’s mind again, as investors lose their cool over the idea of another recession. 

The global sell-off in stocks that kicked off on Friday has carried on this week, all thanks to worries about the US economy. A jobs report that didn’t quite hit the mark only added fuel to the fire.

Stock prices took a nosedive, and investors are pointing fingers at the US Federal Reserve. They’re not happy that interest rates are still high, sitting between 5.25% and 5.5%, even though the economy seems to be cooling off. 

Headquarters of the Federal Reserve in Washington, D.C.

But don’t panic just yet. Most economists think the US can pull off a “soft landing.” This means inflation could drop to the Fed’s 2% goal without sending unemployment through the roof.

What the economists are saying

Jason Furman, a former White House economist now teaching at Harvard, says:

“Other than the unemployment rate, almost every real economy indicator is growing, some of them going strongly.” 

Jason believes that those predicting a recession are overestimating their knowledge of the economy’s inner workings. 

The last jobs report marked the fourth month in a row that the unemployment rate increased, now at 4.3%. Weak results from big companies like McDonald’s and Diageo suggest that the US consumer isn’t feeling too confident. 

This has some analysts worried that a US recession could be severe enough to impact the global economy. “Once you start to worry about recession, you are usually in a recession,” says Andrew Hollenhorst, an economist at Citi. 

He adds that once the unemployment rate starts to rise, temporary layoffs can become permanent.

The recent data has put pressure on the Federal Open Market Committee (FOMC) to cut rates at their next meeting in September. So far, the rate-setters are keeping their cool. 

Still, markets are now expecting four or five quarter-point interest rate cuts this year, compared to three before last week’s jobs data.

Is the panic justified?

Some economists argue that the recent data isn’t as alarming as it seems. Ernie Tedeschi, a former chief economist on the White House’s Council of Economic Advisors, now teaching at Yale, points out that:

“114,000 jobs is exactly the amount that the United States needs to keep up with labor supply. It was not a weak report, it was a trend report.” 

When the economy is at full employment, there’s not much room to grow, but that doesn’t mean it’s crashing. Federal Reserve officials also emphasize that the unemployment figure remains low by historical standards. 

San Francisco Fed president Mary Daly commented that there’s still “a little more room for confidence that we’re slowing but not falling off a cliff.” 

Goolsbee echoed this, saying that while the non-farm payrolls number was weaker than expected, it doesn’t yet signal a recession.

President Joseph Robinette Biden

Another big question is whether US consumers can keep driving growth if unemployment continues to rise and the savings they built up during the pandemic start to dwindle.

Delinquency rates on car loans and credit cards have gone up, especially among lower-income households. But these rates aren’t yet at levels seen during the 2008 financial crisis, according to data from the New York Fed.

So, can America actually avoid recession for the second time in a year? The answer is unclear. While the fears are real and the stakes high, the current data suggests that a complete economic meltdown might not be on the horizon just yet.