The post-pandemic economy just keeps defying predictions: consumers haven’t stopped spending; businesses haven’t stopped hiring; and the recession that’s been looming on the horizon since last year seems not to move any closer.
How can a recession be imminent yet distant at the same time? Unlike a weather event, it’s hard to tell, in the moment, when a recession has begun. Economists look at a broad array of data on consumers, businesses, and more to make this call. And currently, some of these factors are telling conflicting stories.
Let’s check in on 3 factors pointing to a slowdown, and 3 others pointing to signs of strength:
1. Manufacturing has stalled
The manufacturing industry came roaring back after the initial shock of the pandemic. Today, it has gone into a slump, as a result of rising prices and rising interest rates. A drop in manufacturing often occurs before the start of a recession, because it is evidence that consumers are starting to spend less.
2. Credit is tighter
Banks are tightening their lending standards, making it harder (and more expensive) for both consumers and businesses to get loans. That trend, which is a normal part of a slowing economy, was exacerbated by the volatility in the banking sector earlier this year.
3. The yield curve is inverted
An inverted yield curve—which describes when long-term interest rates are lower than short-term interest rates—has been flashing a recession signal since last November. The yield curve can invert when short-term rates are high (often because the Federal Reserve is raising rates) but investors seek safety in long-term bonds, pushing their prices up and yields down.
1. Consumers remain resilient
Consumers account for two-thirds of the US economy through their personal spending. Over the past 2 years, they have dealt with rising prices by scaling back their savings and spending what they saved during the pandemic. Still, they are ahead of where they were pre-pandemic. And that's not the only good news for consumers.
2. The job market is strong
Workers still have a lot of power, though not quite as much as they did in 2022 when the "great resignation" was raging. The unemployment rate remains near a historic low. Jobs are still plentiful, though the number of openings has fallen slightly as businesses pare back on their hiring plans.
3. Income growth is finally outpacing inflation
Consumers have seen brisk income growth since the pandemic, but until recently, all of it was erased by inflation, as prices grew more quickly than incomes. Now that inflation has slowed, consumers are finally getting ahead.
Adding it all up
If the scales are nearly balanced, where does that leave us?
Fidelity believes the economy is still in the late stage of the business cycle, when growth is slowing but still positive. Consumers remain resilient enough to make up for other areas of weakness.
However, it's important to say that no one rings a bell to signal the start of a recession. It's likely we won't even know we're in a recession until it's well underway—or already over.
It's also likely the next recession will be relatively short and mild, especially compared to the 2008 recession.
For investors, the important thing is to build a portfolio that can stand the test of time, including the inevitable, occasional recession. Then you can feel good about staying the course, even when the going temporarily gets rocky.