Economic Optimism

https://www.nytimes.com/2023/08/17/briefing/economy.html

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Over the past few weeks, sentiments about the economy have gone from bleak to optimistic.

Inflation is down. The U.S. is still adding jobs, but not so quickly that it is prompting fears of an overheating labor market. Wages are now rising faster than prices, but also not quickly enough to renew worries about higher inflation. In short: The economy is good, but not too good.

What does it all mean for you? The chances of a job-wrecking, wage-crushing recession appear lower than they have in years.

America’s central bank, the Federal Reserve, has been working since 2022 to cool the economy and, with it, inflation. Yet each step the Fed took to raise the cost of borrowing money carried risks — namely, going too far and causing an economic downturn. While it’s too early for the Fed to declare victory, economists are now more optimistic that the economy will make a so-called soft landing: Prices will stabilize without a recession.

“Things are good,” my colleague Jeanna Smialek, who covers the U.S. economy, told me. “But I wouldn’t want to overstate it.”

To understand what is happening with the economy, let’s look at the Federal Reserve. It has a dual mandate: to stabilize prices while keeping unemployment low.

The two goals can be at odds. Consider this scenario: If employers are rapidly adding jobs, there may not be enough workers to fill all the new positions. Knowing this, employers can entice applicants by offering higher pay. To fund those higher wages, companies might try to raise their prices. This is just one of many ways a strong economy can lead to higher prices — also known as inflation.

This dynamic is why traditionally good economic news can turn into bad news during inflationary periods. America is adding a lot of jobs? That may be an overheating labor market and could cause prices to rise. Wages are up? That could translate to higher prices from companies and too much demand from consumers.

The Federal Reserve’s recent mission has been to make sure the economy does not become or remain too good. By raising interest rates, it hoped to slow lending, investment and, eventually, inflation. In doing so, it also risked suppressing the economy to the point of a recession. That scenario played out in the 1980s after years of stubbornly high inflation, and many economists had feared that a repeat would be needed to bring down prices today.

So far, though, the economy appears to have reached a better balance. Last month, prices were up 3.2 percent compared with a year before, down from a peak of 9.1 percent last summer. The unemployment rate fell to 3.5 percent, near a record low. And wage growth again surpassed inflation, as this chart by my colleague Ashley Wu shows:

None of this is a guarantee of future prosperity. The economy is tremendously complex, and it often takes turns that few saw coming. Inflation is still above the Federal Reserve’s target of 2 percent, and minutes from July’s Fed meeting released yesterday suggest policymakers are determined to slow it further. Some experts are more optimistic now, but they tend to mix that outlook with caution.

As Jeanna said, “We’re just going to have to be patient.”

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Thanks for spending part of your morning with The Times. See you tomorrow. — German