Can the US economy avoid a recession?
Each quarter, The Wall Street Journal releases its latest Economic Survey. The survey asks more than 70 participating economists their projections on interest rates, economic growth, unemployment, consumer spending and inflation, among others. Its goal is to provide a broad-based forecast on the direction of the American economy. Last week, the Journal released its survey for the July-September third quarter.
54% of respondents expect the economy will enter a recession within the next 12 months. This is down from the 61% reported in the prior two quarterly surveys. A recession is defined as two consecutive quarters of negative economic growth. In other words, the economy actually contracts and gets smaller. America’s last technical recession was in in the first half of 2022, when economic growth was reported at -1.6% in the first quarter and -0.6% in the second quarter.
On the positive side, despite concerns of a potential recession, the U.S. labor market remains quite resilient. In June, the national unemployment rate fell from 3.7% to 3.6%, near a 50-year low. So far this year, the economy has added an average of 278,000 new jobs each month. For economists, a strong labor market bodes well for the argument that a recession can be avoided. Consumer spending drives two-thirds of our nation’s economic growth. When jobs are plentiful, as they currently are, consumers tend to spend their money more freely which ultimately fuels the American economy.
But many economists are quick to note the labor market has been gradually weakening. Over the past 12 months, the number of new jobs being added each month has steadily declined. In June, the 209,000 new jobs added was the lowest monthly gain in two and a half years. By the end of this year, according to the Journal’s Economic Survey, the unemployment rate is expected to rise from its current 3.6% to around 4.1%. By the end of 2024, the rate is expected to jump to around 4.5%.
Whether the U.S. economy ultimately dips back into recession will rely heavily on the durability of the American consumer. High inflation and rising interest rates continue to take a heavy toll on household budgets. Another consideration is the state of America’s key trading partners who consume vast amounts of U.S.-made goods and services. Many face daunting economic challenges of their own.
China, America’s largest single-nation trading partner, continues its post-pandemic economic struggles as it tries to recover from its harsh COVID lockdown and quarantine policies. In the second quarter, China’s economy – the world’s second largest – grew at an annualized rate of just 0.8%. China’s unemployment rate for the ages 16-24 rose to 21.3%, a record high. Both consumer and business spending have also weakened.
The Eurozone, defined as the 20 European countries that use the euro as their primary currency, is another large trading partner whos collective economy is also struggling. The Eurozone entered a technical recession when economic growth was reported at -0.1% in both the fourth quarter of 2022 and the first quarter of this year.
The American economy still has a number of hurdles to overcome. But, for now, economists are a little more hopeful a recession can be avoided in the next 12 months.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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