- Recession fears have grown throughout 2022, but data signals a downturn isn't coming soon.
- Layoffs are back to pre-crisis levels, and Americans' spending is at a record high despite high inflation.
- The US could very well be heading into a downturn, but it's likely at least several months away.
Recession warnings are the loudest they've been since early 2020. The latest data, however, suggests it's early to be so worried.
Outlooks toward the economic recovery have been split into two camps. In one corner, hawkish economists fear the Federal Reserve's fight with inflation will slow the rebound to a halt. Rising interest rates, according to the group, will crush spending and pull the country into a new, albeit mild, recession.
In the other, more optimistic experts see little reason for such concern. They concede inflation is a problem, and that growth is slowing down. Yet they're just as focused on the rest of the economy, and although inflation data is sounding alarms, other signals show the US faring extremely well for a country that just climbed out of a historic recession.
Leading indicators offer economists the closest thing to a preview of economic growth, as they tend to reveal trends earliest. Reports including weekly jobless claims and factory orders can reveal the first signs of a coming downturn, but so far, they're showing little cause for concern.
"I think the economy is fine," Neil Dutta, head of economics at Renaissance Macro Research, said on Bloomberg's "Odd Lots" podcast earlier in May. He said if he were forced to answer, "'do you think growth is going to come in stronger than what the consensus is for Q4 2022?' My guess would be 'probably yes.'"
The Fed's rate hikes are expected to cool growth, but the effects won't be felt in full for at least several months. Until then, the most closely watched recession alarms are encouraging.
Mass layoffs aren't happening yet
Job losses are a hallmark of economic downturns. Concerns over rising unemployment have grown through 2022 as economists see higher rates hitting the brakes on hiring efforts.
So far, there's been no sign of job creation easing up. The US added 428,000 nonfarm payrolls in April, beating economist forecasts and repeating the same increase seen the month prior. Despite having recovered about 95% of the jobs lost earlier in the pandemic, monthly payroll gains are still double the pre-crisis trend. If the pace holds, the country will complete its labor-market recovery by the end of July.
Demand for workers, then, remains strong, and businesses are keeping a tight grasp on the employees they already have. Weekly filings for unemployment insurance sit close to the same levels seen before the coronavirus crash. Continuing claims, which track the number of Americans actively receiving unemployment benefits, totaled 1.32 million in the week that ended May 7, marking the lowest level since December 1969. If companies are bracing for a downturn, it's not showing up on their payrolls.
If anything, it's workers that are ditching their employers, and not the other way around. Monthly quits hit a record high 4.5 million in March, reflecting the tenth straight month that more than 4 million Americans walked out of their jobs. Quitting tends to swing higher when employees are confident they can find higher pay or better working conditions elsewhere.
With job openings hitting a fresh record in March and pay climbing at a historic pace, it's clear that companies are still desperate to hire and retain workers, not shed payrolls. Until jobless claims edge higher or payroll growth turns negative, a recession is likely months away from materializing.
Americans are shopping through inflation
Shoppers are also acting like a recession is a long way out. Despite consumer sentiment sitting at the most pessimistic level in a decade, spending is still climbing. Retail sales gained 0.9% in April to hit a record $677.7 billion, according to government data published Tuesday. Inflation might be dragging on Americans' moods, but they're still spending well above the pre-pandemic trend.
Sales data is among the most prescient for judging the health of the economy. Consumer spending accounts for about 70% of economic activity, meaning a sudden slowdown would have a major negative effect on the country. Business revenues would plunge, and employers would lay off workers to protect their bottom lines. While sales growth has steadily slowed throughout 2022, it's far from sliding into a contraction.
"What we're seeing today in the US economy is a fairly robust economic backdrop. We still have consumers spending at a decent clip," Greg Daco, chief economist at EY-Parthenon, told Insider.
Businesses, meanwhile, are betting that the shopping spree will live on. New orders for manufactured goods gained 2.2% in March, doubling the average forecast and sharply accelerating from the 0.1% increase in February. The measure is a closely watched forward indicator of economic activity, as an uptick in orders reflects expectations for strong demand.
The demand side of the economy is looking plenty strong. Look for spending growth to turn negative or factory orders to contract for the first signs that the rebound is shifting into a recession.
Other forward-looking gauges are in the green
Even the less conventional measures of future recession risk aren't flashing warning signs just yet.
The yield curve has long been lauded by investors as a dependable forward indicator of economic downturns. The tool tracks yields for a range of Treasury maturities, effectively showing what investors expect economic conditions to look like in the future. An inverted yield curve — in which short-term rates exceed long-term yields — has preceded most major recessions, as it reflects investors moving into safer assets amid fears of a downturn.
The yield curve briefly inverted in March but has since pivoted back to a more normal state. The tool only tracks market expectations, and has no direct connection to the performance of the economy. The reversion back to a normal curve, particularly so soon after the inversion, hints investors aren't so sure that a recession is looming.
The Conference Board's own collection of leading indicators is also in healthy territory. The organization's Leading Economic Index edged just 0.3% lower to 119.2 in April but still sits 0.9% higher than where it was six months ago. The LEI's flat trend through 2022 is "in line with a moderate growth outlook" and economic output is likely to rebound in the second quarter, Ataman Ozyildirim, senior director of economic research at The Conference Board, said.
Significant uncertainties remain, particularly as Russia continues to wage war on Ukraine, the labor shortage rages on, and lockdowns in China threaten to snarl supply chains. Yet most indicators suggest the recovery is still intact. A recession could be on the horizon, but it probably isn't coming anytime soon.