"New Federal Reserve Communication Agency" heavyweight long article explains in detail: Why hasn't the U.S. economy entered a recession yet?

Renowned financial journalist Nick Timiraos, also known as the "New Fed News Agency," stated in his latest article on Friday that, as of now, the unanimous expectation of corporate executives, economists, and investors is that the U.S. economy is not in a recession. While those who previously predicted a recession in the U.S. economy were wrong, it does not mean they will not eventually be correct.

Timiraos believes that the U.S. economy's resilience, following the recession caused by the COVID-19 pandemic four years ago, is fundamentally unusual. The subsequent implementation of aggressive policy measures is the fundamental reason for the remarkable resilience of the U.S. economy to date.

Preview of the June Federal Reserve Meeting

The theme of Timiraos's latest article is why the U.S. economy has not yet entered a recession. While analyzing this theme, he also provided a preview of the upcoming June Federal Reserve meeting.

He stated that Federal Reserve officials are expected to maintain the benchmark interest rate at 5.25%-5.5% at the upcoming FOMC meeting next week, the highest level since 2001. Although the Bank of Canada and the European Central Bank have started cutting interest rates, the U.S. economic growth is stronger.

The Federal Reserve is trying to strike a balance between two risks: on one hand, premature rate cuts may lead to persistent inflation, while on the other hand, keeping rates too high may trigger unnecessary economic slowdown:

Looking ahead, the Federal Reserve must address two risks. One is that the seemingly "normalizing" economy emerging from the pandemic will eventually weaken further and fall into the long-predicted recession. The second risk is that if the Federal Reserve turns to rate cuts to prevent economic weakness, it may reignite economic activity and asset prices, leading to inflation staying above the Federal Reserve's 2% target.

Federal Reserve officials may indicate at the June meeting that they may still cut rates later this year, but they want to see several months of inflation and employment data before taking action.

At the last meeting, Federal Reserve officials were puzzled as to why their rate policy did not do more to slow the economy. After three medium-sized U.S. banks collapsed last year, the Fed's economists added recession expectations to their forecasts submitted to rate policymakers every six weeks, which was extremely rare. After the easing of banking pressures in July last year, they no longer predicted a recession.

No Recession in the U.S. Economy - Labor Market

Timiraos pointed out that stable hiring continues to boost consumer spending, thereby driving the expansion of the U.S. economy, a phenomenon unseen in the U.S. economy before.

The article listed the following labor market data:

The latest data from the U.S. Department of Labor on Friday showed that the country added 272,000 non-farm jobs in May, with employers adding a total of 2.75 million jobs over the past 12 months.

The U.S. unemployment rate has remained at 4% or below for 30 consecutive months, the last time the unemployment rate was this low dates back to the late 1960s and early 1950s Despite the current low unemployment rate in the United States, it has risen from the extremely low levels after the COVID-19 pandemic: the unemployment rate in May was 4%, higher than April's 3.9%, and in April last year, the rate had dropped to as low as 3.4%.

The pace of hiring by businesses has dropped to levels seen seven years ago. Job vacancies that surged during the COVID-19 pandemic have now returned to pre-pandemic levels.

The article also mentions changes in hiring practices in some markets affected by the pandemic:

As some industries are still working to restore employment to pre-pandemic levels, strong job growth is lasting longer than expected. For example, over the past two years, the leisure and hospitality industry added 1.3 million jobs, but still lags behind the long-term trend by about 1 million.

Initially facing challenges in recruitment, companies are now slow to lay off workers. In recent years, due to a wave of early retirements, some companies have gone to great lengths in the recruitment process and are therefore less willing to lay off workers during economic downturns.

Overall, the imbalance in the U.S. labor market has resolved itself so far, and this has been achieved without an economic recession.

Looking ahead, the article mentions:

If job vacancies decrease significantly, the unemployment rate will rise.

While companies have not laid off workers, if interest rates remain high for a longer period, it will erode profit margins, leading to a decline in profits, which will increase the pressure for future layoffs.

Two years ago, the Federal Reserve raised interest rates at the fastest pace in decades to counter what was initially perceived as a possible short-term inflation. Companies rushed to recruit employees, significantly increased wages, and handed out bonuses, leading to soaring prices. Investors, economists, and some Federal Reserve officials believe that a higher unemployment rate may be needed to restore supply and demand balance.

No Recession in the U.S. Economy - Strong Private Sector

When the Federal Reserve began raising interest rates, the balance sheets of the private sector were exceptionally strong. Many households and businesses locked in ultra-low borrowing costs after the historic rate cuts by the Federal Reserve, thereby avoiding the impact of subsequent rate hikes.

Typically, during the recovery period from a recession, households tend to be more cautious in spending and lean towards saving. Lower interest rates support consumption, while higher rates inhibit it.

However, this time is different, as economic activity is more supported by wealth and income rather than credit-driven. The pandemic has changed consumption habits, coupled with rising asset prices, good employment prospects, and government stimulus policies, making more households feel financially comfortable.

Surveys show that consumer confidence has declined since the pandemic, but their significant spending shows the opposite. People feel more confident, so for every additional $1 in income and net wealth, they spend more. Over the past three years, the ratio of household net worth to income has been higher than at any time before the pandemic.

After the recessions in 2001 and 2008, asset prices fell, but this time they did not. Despite a brief decline in early 2020, the surge in the U.S. stock market and housing prices has fueled consumption among high-income consumers On the other hand, low-income consumers have depleted their savings during the epidemic and are beginning to rely on credit card borrowing. Under the impact of high interest rates, their payment delinquency rates are rising, and discount retailers report weakening demand.

U.S. Government Spending Takes Over the Baton

As the threat of interest rate hikes by the Federal Reserve affects employment in interest rate-sensitive sectors such as housing and manufacturing, new spending by the U.S. government on infrastructure, computer chips, and battery factories has taken over the baton.

The additional spending by the U.S. government on infrastructure and green energy projects has just begun to impact the country's economy. In the fourth quarter of last year, construction spending in manufacturing increased by 67% year-on-year.

Goldman Sachs Vice Chairman and former Dallas Fed President Robert Kaplan stated that the impact on the labor market is forward-looking, occurring when infrastructure bills or projects like the "Inflation Reduction Act" are announced, even if fiscal spending does not happen immediately.

Furthermore, many of these projects may attract workers transitioning from low-wage service sector jobs, further increasing demand, such as for childcare services or dining at restaurants.

Other types of business investments are also increasing, including software and R&D investments, which are less sensitive to high interest rates.

Timiraos also mentioned that some medium-sized market companies that may have been in trouble have been acquired by private equity firms. These groups are more seasoned and know how to engage in distressed debt transactions to protect their value, so they are barely holding on.

Compared to Europe, the decrease in the number of bankruptcies of U.S. companies is much greater, and the number of new business formations has significantly increased, which has also promoted job growth. According to research by the Federal Reserve, as of the end of last year, the number of new business registrations in the U.S. increased by 53% compared to four years ago, while Europe only increased by 8%.

New Immigrants

Timiraos stated that the U.S. economy benefited last year from an unusual increase in immigration, further promoting employment, supporting consumption, and easing wage pressures.

Not All Smooth Sailing

Timiraos bluntly stated that nothing illustrates the abnormal conditions during the epidemic period better than the U.S. real estate market. The average interest rate for a 30-year mortgage in the U.S. is currently hovering around 7%, compared to 3% three years ago. High interest rates not only affect demand but also suppress supply. Many homeowners without mortgages or locked in at low rates are unwilling to move.

However, according to data from the Intercontinental Exchange, the average interest rate for delinquent mortgages in the U.S. in April was 4.1%, which is not significantly different from 3.9% three years ago.

Due to the extremely low inventory in the second-hand housing market, home builders are benefiting. However, new home inventory has risen to the highest level in over a decade in recent months, highlighting potential weakness. Higher rates also mean higher costs for builders holding inventory.

The traditional spring real estate market this year has been disappointing, although buyers are more willing to close deals compared to last year. The market remains very slow, with industry insiders stating that the current number of buyers has almost reached its lowest point.

The U.S. economy also faces risks from industries that were not prepared for high interest rates, hoping that the Federal Reserve can quickly control inflation and lower rates. The hardest-hit area is investors in the commercial real estate market and their lenders, including small and medium-sized banks, who may face greater losses if rates do not decrease rapidly Commercial real estate is facing pressure, not only due to the impact of the hybrid office model on office buildings themselves, but also in terms of refinancing. Owners of billions of dollars of office building debt that matured last year are extending their loans for about a year. Many of these properties, whose value has declined, are refinancing at close to 7% interest rates, compared to loans obtained at 3% interest rates in 2020 or 2021.

Randal Quarles, who served as Vice Chairman for Supervision of the Federal Reserve Board from 2017 to 2021, stated:

If rates stay at this level, some people won't be able to hold on.

However, Quarles also mentioned that the Fed's rapid rate hikes have frozen the debts of many borrowers, which may actually prolong the time needed for high rates to slow economic activity. Companies that are least prepared and most vulnerable to high rates are just delaying as much as possible.

In the coming years, there will be hundreds of billions of dollars of corporate bonds and loans maturing annually, but for companies with unsustainable debt, refinancing is pointless if they believe rates will drop soon. They will try to postpone acceptance in any way for as long as possible.

Glenn Kelman, CEO of real estate brokerage firm Redfin, said:

If you think of the economy as climbers on a ridge, sometimes the ridge is very wide, and even major events won't push the economy off the ridge. But now, it feels like the ridge has narrowed a lot.

More and more retailers, food manufacturers, and restaurants that have raised prices rapidly in the past three years are reporting greater resistance to price increases, including Starbucks, McDonald's, and Kraft Heinz. Meanwhile, cruise companies are reporting record booking volumes. Industry insiders mention that consumers are saying they don't plan to buy a $10 fast food cheeseburger, but they really want to go on a six-day cruise