Editor’s Note: Mark Zandi is chief economist of Moody’s Analytics. The opinions expressed in this commentary are his own. View more opinion on CNN.
But wait. Where is the recession? Each passing month, the consensus looks increasingly off-base. Yes, the economy will ultimately slump, but odds are fading that a recession is dead ahead.
Who decides if we are in a recession? The accepted arbiter is the Business Cycle Dating Committee of the National Bureau of Economic Research. This group of highly respected apolitical academics define a recession as a broad-based and persistent decline in economic activity. That is, there are significant declines in activity across many industries for more than just a few months.
The pessimists have history on their side. When the economy struggles with high inflation and the Federal Reserve quickly increases interest rates to quell it, recession almost always follows. Some key markers that economists monitor for recession risks — such as the Conference Board’s index of leading economic indicators and an inverted yield curve — are also signaling a downturn.
For several reasons — more or less unique to this time — we haven’t suffered a recession, and the odds are that we won’t. Here are my top five reasons:
First, excess savings. Consumers could not spend as usual during the pandemic. They were stuck at home, forced to shelter-in-place and they saved a lot of money by doing so. Consumers have been using those savings since then to supplement the purchasing power that was eroded by high inflation. They have not been spending with abandon, but just enough to keep the economy moving forward. Consumers are the firewall between recession and a growing economy, and the firewall is holding firm.
Second, labor hoarding. Businesses desperately want to avoid layoffs. Even before the pandemic, they struggled to hire and retain talent. The pandemic made this substantially more problematic when workers could not work for fear of getting sick or finding child care. Now on the other side of the pandemic, businesses understand that labor shortages will be a persistent problem as the Baby Boomer generation retires in the coming decade.
Businesses also have come to rely increasingly on foreign immigrants to fill jobs at all skill levels — a practice that has gotten tougher because our immigration system remains broken in more ways than one.
Third, light debt loads. Households and businesses have borrowed prudently since the global financial crisis over a decade ago. Households now shell out less of their income on interest and principal payments on their debts than at any time recorded in history, except at the height of Covid-19, when pandemic relief included a moratorium on some mortgage and student loan payments. Businesses are also devoting a near record low amount of their profits to debt payments, freeing up cash to finance hiring and investment.
It is especially encouraging that households and businesses also did a marvelous job locking in the previously record low interest rates and are largely insulated from the currently higher rates. Some lower-income households have overdone it, taking on too much credit card credit and personal loan debt, and some businesses acquired by private equity firms have taken on lots of debt. But these are exceptions.
Fourth, anchored inflation expectations. The key threat to optimism for avoiding a recession is that inflation may remain too high for the Fed’s comfort, leading the central bank to raise rates until the economy breaks. The Fed has a tough job. It must raise rates high enough and fast enough to slow growth and quell inflation, but not so high and so fast that it undermines the economy.
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But the Fed’s success so far in pinning down inflation expectations makes its job easier. If consumers and businesses believe the Fed will do what is needed to ensure inflation recedes, then they will behave accordingly. And that makes it more likely to come true.
Fifth, low oil prices. There have been a dozen recessions since World War II, almost all preceded by a spike in oil prices. We are less dependent on oil than we have ever been, due to the fracking revolution and the move to green energy, but we are still dependent. And when Russia invaded Ukraine early last year and oil prices jumped, it did not augur well for our economy. Russia accounts for about one-tenth of the world’s oil supply, and US and European sanctions on Russian oil suggested oil prices would remain high.
Given history, there’s no shame in the consensus that we would follow a familiar recession pattern now. However, this time is different. Yes, the economy is fragile and vulnerable to losing the script. And goodness knows we have been off script more often than not in recent years. But odds are that we will buck history and avoid recession.