Economists rethinking dire predictions

Many economists and investors had a clear narrative coming into 2023: The Federal Reserve had spent months pushing borrowing costs rapidly higher in a bid to tame inflation, and those moves were expected to slow growth and the labor market so much that the economy would be at risk of plunging into a downturn.

But the recession calls are now getting a rethink.

Employers added more than half a million jobs in January, the housing market shows signs of stabilizing or even picking back up, and many Wall Street economists have marked down the odds of a downturn this year. After months of asking whether the Fed could pull off a soft landing in which the economy slows but does not plummet into a bruising recession, analysts are raising the possibility that it will not land at all — that growth will simply hold up.

Not every data point looks sunny: Manufacturing remains glum, consumer spending has been cracking and some analysts still think a mild recession this year remains likely. But there have been enough surprises pointing to continued momentum that Fed officials themselves seem to see a better chance that the nation will avoid a painful downturn. That resilience could even be a problem.

While a gentle landing would be a welcome development, economists are beginning to ask whether growth and the job market will run too warm for inflation to slow as much as central bankers are hoping — eventually forcing the Fed to respond more aggressively.

“They should be worried about how strong the U.S. labor market is,” said Ajay Rajadhyaksha, who heads global research at Barclays. “So far, the U.S. economy has proved unexpectedly resilient.”

The Fed has lifted rates from near-zero early last year to above 4.5% as of last week — the fastest series of policy adjustment in decades. Those higher borrowing costs have translated into pricier car loans and mortgages, and for a while they seemed to be clearly slowing the economy.

But as the central bank has shifted toward a more moderate pace of rate moves — it slowed the speed of its increases first in December, then again this month — markets have relaxed. Rates on mortgages, for example, have come down slightly.

That’s showing up in the economy. Mortgage applications have been bouncing around, but in general they have ticked back up. New home sales are now hovering at around the same level as before the pandemic. Used car prices had been declining, but they have begun to rise at a wholesale level — which some economists see as a response to some returning demand for those vehicles.

And while retail sales and other measures of household spending have been pulling back, according to recent data, several nascent forces could help to shore up consumer demand into 2023 — with potentially big implications for the Fed’s battle against inflation.

For one thing, Social Security recipients just received a sizable cost of living adjustment in their first check of 2023, putting more money in the pockets of older Americans.

Adding to that, after more than a year in which inflation eroded consumer spending power, wage gains are finally beginning to outstrip price changes by some measures in recent months.