Recession or Soft Landing Five reasons to be cautiously optimistic

Recession or Soft Landing? Five reasons to be cautiously optimistic about 2023

New York CNN —

The past year has been marked by frightening headlines about crushing inflation, outsized rate hikes and growing fears of a recession.

It was a brutal time for the stock market, with about a fifth of the value of the S&P 500 disappearing and the Nasdaq falling by more than a third. All three major US markets experienced their worst years by far since 2008.

And yet, now that 2022 is over, there are clear bright spots in this economy that give hope that 2023 will not be the year when the next recession begins.

The setting remains surprisingly resilient. The economy added a robust 263,000 jobs in November and the unemployment rate is just 3.7% – a dramatic drop from almost 15% in spring 2020.

This is just a touch above the half-century low that was set earlier this year. Although big tech and media companies like Amazon, Twitter and Meta have laid off thousands of workers, initial jobless claims remain low. And new figures released last week show that the number of initial jobless claims has risen to 225,000. That’s still low historically, and almost exactly where jobless claims were a year ago, well before recession fears surfaced.

“This is reason to be optimistic that the economy could avoid a recession,” Mark Zandi, chief economist at Moody’s Analytics, told CNN on Thursday. “Without mass layoffs, consumers are unlikely to stop spending and the economy is unlikely to suffer a downturn.”

The cost of living is still far too high, but inflation seems to have peaked.

Consumer prices rose 7.1% yoy in November. At almost any other point in the past 40 years, that would have been alarmingly high. However, this was the fifth consecutive month of improvement and a significant slowdown from 9.1% in June. It’s also the lowest annual inflation rate in almost a year.

If this trend continues, the risk of a recession could decrease significantly. But if inflation stays well above the Fed’s target of 2%, that would be problematic.

The #1 headache for consumers for much of this year has eased significantly.

After gas prices rose above $5 a gallon for the first time in June, gas prices have plummeted. The national average for regular gasoline recently fell to $3.10 a gallon, an 18-month low, although it has risen to about $3.22 a gallon in recent days.

Gas prices are expected to pick up again this spring and summer, but experts aren’t predicting a return to $5 a gallon, at least for now.

For much of last year, wages have been hot, but inflation has been hotter.

That means, adjusted for inflation, paychecks have shrunk.

But that trend has started to reverse, at least when measured on a monthly basis. Real wages have been growing faster than consumer prices, a significant shift that could give consumers the boost they need to keep spending next year.

The Fed’s war on inflation is why the risk of a recession is significant. The central bank is effectively putting the brakes on the economy.

The rise in borrowing costs has already triggered a deep slump in the real estate market, the most interest-rate sensitive part of the economy.

The fear is that if the Fed hasn’t already done so, the Fed will eventually overdo it, raising rates high enough and keeping them there long enough to cause a recession.

But Fed officials have signaled they may be ready to pause their anti-inflation campaign late in the winter or early in the spring.

Federal Reserve Chairman Jerome Powell has made it clear that the Fed is far from ready to gas the economy by cutting interest rates. But just taking your foot off the brake would be positive.