Is the US economy already in trouble? Maybe not, but it’s headed for dangerous territory.
The economy entered the new year at a brisk pace. The rise in interest rates planned by the Federal Reserve to fight inflation has also brought a significant boost to growth.
Start by using the consumer, the main engine of the economy. It fell in the last two months of 2022.
Businesses aren’t about to save, either.
The construction industry was the first to pull back last year after interest rates rose due to housing sales. Lately, manufacturers have backed down due to sales delays.
Industrial production fell in November and December and management has indicated that it will be cautious at the start of the new year.
The government is no longer helping as it did in the first few years of the epidemic.
Republicans who have taken control of the House will not support economic stimulus if the economy is failing. He blames huge increases in government spending early in the Biden administration for fueling inflation — a point that even prominent Democratic economists don’t dispute.
All of these factors combined indicate to economists that a crisis is on the way or that it is all set to happen soon.
“The economy peaked, and it may have already bottomed out,” said Paul Ashworth, North American economist at Capital Economics.
However, the story is not complicated.
Take the labor market. The number of new jobless claims filed fell to a four-month high of 190,000 in January, putting it near the highest level since the 1960s.
The unemployment rate also fell to 3.5% in December to match the lowest level in more than 50 years.
In short, as long as more people are working, they can spend enough money to keep businesses stable and prevent companies from laying off more workers. If so, the economy can avoid collapse.
Furthermore, the inflation balloon is deflating rapidly.
Inflation was reduced to 5% in December from 5.5% the previous month, using the Fed’s PCE price index published on Friday. It hit a 40-year high of 7% last summer, well above the central bank’s 2% rate.
A slow recession and a strong labor market, too, have fueled Americans’ optimism. Consumer sentiment rose in January for the second month in a row and Americans increasingly believe that inflation is slowing.
If inflation slows, the Fed may stop raising interest rates soon. The bank is expected to raise rates again next week, but the increase in Wall Street’s DJIA,
investors are betting it could be the last this year. Some think the Fed will cut rates later in 2023.
You see: Fed sets quarterly rate hikes with ‘last hawkish tail extension’
The big question is, has the powder been cast yet? Rising interest rates take time to slow the economy and it is possible that worse is yet to come.
The Fed is also unlikely to raise rates.
One of his concerns is that higher wages are linked to a stronger labor market. Fed officials want wages to rise slowly, which means more layoffs and unemployment.
“Right now, it looks like the recession is still going strong,” said Jim Baird, chief financial officer at Plante Moran Financial Advisors. “It’s not a big question of ‘if’, but ‘when,’ ‘how,’ and ‘what time.’ ”
Listen to yourself. MarketWatch plans to check in regularly with readers to see how the economy is doing.
