How long can the US economy hold on?

How long can the US economy hold on?

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Good morning,

It can be difficult to understand the wave of economic headlines: Are we in a recession? Will prices continue to rise? Where should I invest my money?

In this new quarterly series, we’ll go into detail What you need to know about the state of the US economyAnd where does he go next?

We’ll start by zooming out, and take you through the big indicators. Then we’ll have some conversations with real people on the ground, before we reach out to economists to get their thoughts.

Big data: a mixed bag

The Corona virus disrupted supply chains and led to higher inflation. The Fed embarked on an aggressive campaign starting about a year and a half ago to combat this, raising interest rates dramatically.

Debt is now much more expensiveThe average interest rate on a 30-year fixed mortgage topped 7% in August, reaching its highest level in 21 years.

The rule of thumb for defining a recession is two consecutive quarters of declining GDP, which is what happened last year. Another key indicator is Inverted yield curvewhen short-term interest rates are higher than long-term interest rates, and this has been the case since 2022.

However, the economy remained more resilient than expected. GDP grew faster than expected in the second quarter at 2.1%, the fourth consecutive quarter of growth. Third-quarter GDP data won’t be released until later this month, but forecasters surveyed by the Philadelphia Fed are expecting higher output for the next three quarters than they had previously.

Looking at the labor market, the unemployment rate is historically low at 3.8%. while Hiring appears to be slowing down In August, a Friday report from the Bureau of Labor Statistics showed that the economy added 336,000 jobs in September, well above the 170,000 jobs economists had expected.

And the stock market? Markets are starting to falter after a strong first half year amid investors’ concerns about rising interest rates. The end of the summer was a nice stretch for stocks, with the Dow Jones Industrial Average flat, the S&P 500 down 1%, and the tech-heavy Nasdaq down 2%.

However, the S&P 500 was up 11% in 2023 as of the end of Thursday, the Dow Jones was down a slight 0.05%, and the AI ​​boom has boosted the Nasdaq’s gains by 27% this year, excluding reinvested dividends.

Inflation remains stubbornly above the Fed’s 2% target.And Consumer prices rose 3.7% in the 12-month period ending in August. This was the largest monthly increase since January, driven by higher gas prices, although well below the 8.3% level seen a year ago.

Although one key metric is at its lowest level in almost two years: Core inflationwhich excludes more volatile food and energy indexes, was 4.3% in August.

Inflation subsides, but workers don’t stop

Take Jimmy Tillman, for example. She had been homeless since she was 18, but in March 2020, her faith led her to the Dream Center, a transitional housing facility in Jackson, Tennessee, for women and their children experiencing homelessness. “In the meantime, I’m going to pay off debt, go to work, go to church, and rebuild my life with my kids,” she says.

In the more than three years since then, she’s paid off a significant portion of her roughly $30,000 in credit card debt and improved her credit score.

Tillman was initially making just $2.13 an hour in a tipping job, making that goal nearly impossible to achieve. She eventually landed a role that paid $12.50 an hour, but was still paying off debt on her income It took sacrifices, some big and some small.

With fuel prices rising, she only makes necessary trips to work and to take her 3-year-old son to nursery. She tries to see her mother and two daughters who live three hours away once a month, but has to be careful because she drives an old car, and doesn’t want a repair that takes her goals off track.

On a recent Saturday, Tillman and her son wanted to buy their favorite ice cream at the grocery store, but it was nearly $9. So they had to settle for a cheaper brand.

When inflation started to rise sharply last year, many like Tillman could no longer keep up. The cost of daily purchases, from groceries to rent, took up a larger portion of what workers earned. In the spring of 2021, The Consumer Price Index began to grow faster on an annual basis than wages.

Consumer confidence

As a welcome relief, inflation has slowed recently, and in May, wage growth began to outpace inflation for the first time in years. But the gap It is not expected to close until sometime in the fourth quarter of next yearBankrate reports.

Additionally, this momentum may slow as the labor market slows with the Federal Reserve’s moves. From August to September, average hourly earnings increased by just 0.2%, a slower growth rate than expected.

Despite all this, Americans still open their wallets. Consumer spending, which accounts for about two-thirds of U.S. economic activity, rose 0.4% in August, following a 0.9% increase in July that was the largest in six months.

But some warning signs are flashing red.

A University of Michigan poll found that consumer sentiment, while above a historic low at the peak of inflation last summer, fell 2% in September.

Prices at pumping stations are part of what keeps inflation going. Last month, oil prices reached their 2023 peak, before declining in late September and the first days of October. The average price of a gallon of gas is about $3.72, according to GasBuddy, though it has declined steadily in the past few weeks after hitting an 11-month high on Sept. 15.

The global nonprofit network supports United Way 211, a phone line that connects millions of people in need with local resources such as food assistance programs and housing support. says the nonprofit 211 calls reached their highest levels in August Most of it was intended to help pay utilities and housing-related demands.

Marina Gutierrez, communications coordinator for the United Way’s Santa Barbara chapter, says more of the thousands of families the organization helps are living on the edge in terms of finances. One unexpected expense like car repair or even buying a new pair of glasses spoils everything.

“It’s not just about inflation; Family financial institutions have been devastated over the past two years“And now the situation will not improve without major intervention,” she says.

Consumers across the country are expected to spend the last of their pandemic savings in the third quarter. This is further complicated by the fact that household debt is rising, and higher interest rates mean higher credit card balances. Credit card debt has surpassed $1 trillion for the first time ever, according to a survey by the Federal Reserve Bank of New York.

Additionally, borrowers are experiencing the added pain of student loan payments due this month. Oxford Economics estimates that the resumption will lead to a decline of about $105 billion in consumer spending.

All of this leads some economists to wonder: Are there clouds on the horizon?

The big question

Is the United States still heading toward a recession?

Top line According to many economists’ forecasts earlier this year, the United States appeared to be headed toward a recession by the end of 2023. The Federal Reserve was rapidly raising interest rates to combat inflation, and the financial system was stressed by the failures of First Republic, Signature, and Silicon. Valley banks.

Now, economists They were divided on whether a recession was coming This year or next, or if the Fed can implement what is known as a “soft landing” — cutting inflation to its 2% target without causing a recession.

Goldman Sachs lowered its recession forecast for next year to 15% in a September report due to continued positive inflation and labor market news. Brett House, professor of professional practice in economics at Columbia Business School, puts it The chances of the United States avoiding a recession are 60%..

Economic growth, although slow, is better than expected. Besides, House says, these gains were impressive in 2021 and 2022 as the economy recovered from the pandemic.

We’re getting back to something closer to normal “Now,” he says.

The economy reopened after the pandemic unleashed pent-up demand for goods, then turned to services: dining out and holding events like Taylor Swift and Beyoncé concerts.

When the phenomenon known as “revenge spending” ends, Jeffrey Roach, chief economist at LPL Financial, believes… An uptick in delinquencies and defaults and dwindling savings are signs you may be close.– That’s when we’ll likely see a mini-recession. It is believed that it could happen this year or at the beginning of 2024.

What then On the one hand, the Fed’s tightening has succeeded: inflation has fallen to a level much closer to its target. But the economy’s resilience surprised policymakers, and Fed staff increased their forecasts for GDP growth and lowered their forecasts for the unemployment rate.

The good news is that rates may not rise much higher. The central bank kept the federal funds rate unchanged at its September meeting, although there could be another increase in November (the futures market currently expects a 19.6% increase in November, according to data from the US Federal Reserve Fund). CME until Thursday afternoon).

The downside of a strong economy is that we are We are likely to see interest rates remain higher for longer than previously expected. This news caused great concern in the markets, and the Dow Jones Industrial Average witnessed its worst day since March on September 26th. Those on both sides of the equation agree that Whether there is a recession depends mostly on the consumer. “I think we’re going to have a recession when the consumer says, ‘Okay, I’m done,’” Roach says.

Strategy and success

Here are some helpful tips to make the current economy work for you:

12 ways to beat inflation in your investment portfolio

Billionaire stocks for market rebound in October

Inflation insurance for retirees: what does it cost?

What will higher inflation do to your bonds and bank stocks?

Chasing the Big Yield: Why a Trillion Fleeed Traditional Bank Accounts

a test

We’ve reviewed many of the indicators that economists track, such as consumer spending and inflation, but there are some unusual ones, too. Any of the following indicators Does he think they are indicators of the direction the economy is headed?

a. Building a skyscraper

B- Men’s underwear

C- Lipstick

Dr.. Everything mentioned above

Check your answer.

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And before you go, read our tribute to seniors Forbes Contributor Gordon Kelly, one of the longest-standing members of the Contributor Network who tragically passed away on October 1st.

(Tags for translation) Gas prices

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