WASHINGTON — The United States has avoided a feared recession with the help of surprisingly strong spending by consumers and good luck in eluding potentially damaging economic hits, such as a protracted auto workers strike. But analysts said the risk of a downturn in the next year remains uncomfortably high because those trends can’t last forever.
Americans buffeted by still-elevated inflation are burning through their pandemic savings and feeling less confident about the economy. There also are new risks ahead, including a possible federal government shutdown this month and a war between Israel and Hamas that could send oil prices skyrocketing if it escalates.
The Federal Reserve on Wednesday demonstrated the economic uncertainty by holding off, as expected, on another interest rate increase as it recalibrates its fight to lower inflation. But Fed chair Jerome Powell cautioned that the rate hikes, which have been a main driver of recession predictions, aren’t necessarily over.
“We’re looking at the data but we’re proceeding carefully,” Powell told reporters after Fed officials kept their benchmark interest rate at a range between 5.25 and 5.5 percent. He added that the Fed’s staff is not forecasting a recession although “there’s plenty of risk out there,” specifically citing the Middle East war.
“This has been a resilient economy and it’s, I think, been surprising in its resilience, " Powell said.
President Biden has seized on that resilience and recent positive economic news to argue that his policies are working. Still, polls show Americans continue to give him dismal ratings on his handling of the economy. And Republicans continue to hammer him on inflation, saying this week that candy prices were 13 percent higher than a year ago.
“Everything, including Halloween, is more expensive under Bidenomics,” read an email blasted out by Make America Great Again Inc., a super PAC supporting Donald Trump.
But Jared Bernstein, chair of the White House Council of Economic Advisers, said the tailwinds on the economy are greater than the headwinds right now.
“I like where we are. I like that momentum,” he told the Globe. “But there’s enough uncertainty there that I’m not going to get into recession predictions.”
Despite the drag from the highest interest rates in more than 20 years, the US economy has been on a roll in recent months. Job growth has been strong and the unemployment rate has held steady at below 4 percent. The economy grew at a sizzling 4.9 percent annual rate from July through September, the fastest since the end of 2021.
At the same time, inflation has continued to slowly moderate from last year’s four-decade high. That’s led to hope that the Fed could bring it back down to normal without triggering a recession, pulling off a difficult “soft landing” for the economy.
“The good news is that the incoming data continue to be consistent with a soft landing,” said Harvard economist Karen Dynan. “It doesn’t assure a soft landing, but I think what we’ve seen suggests that’s the most likely outcome.”
Several potential crises appeared poised to threaten the economy over the past year, but ultimately didn’t materialize — a development that has helped fend of a dip into recession.
The collapse of Silicon Valley Bank didn’t spread into a contagion among regional banks. The White House and Congress struck a deal last spring to avoid a first-ever government default and then last month lawmakers temporarily staved off a government shutdown. And in recent days the United Auto Workers union and Detroit’s Big Three automakers announced tentative agreements to end a strike that could have ballooned into a national economic problem if it had continued through the holidays.
“Job losses in the US would have been measured in the hundreds of thousands if this thing had gone on until January,” said Donald Grimes, a senior research specialist at the University of Michigan who has been studying the strike’s effects.
Patrick Lozeau, 47, of Burrillville, R.I., who was among the UAW workers on strike against Stellantis at the automaker’s parts distribution center in Mansfield, Mass., said continuing the walkout for another month or two would have been difficult.
“In all honesty, I’ve been there a long time and I have a little bit of money saved up and it still would have been hard in my household,” Lozeau, the union local’s financial secretary, said in a text message. “But a lot of my members make between $17 and $23 an hour and it would have been devastating for their households to go another month; 2 months would have been catastrophic.”
But economists said the strong economic momentum is unlikely to continue. They widely expect growth to slow in the last three months of the year and into 2024 as consumers ease up on their overall spending, which has been boosted by savings accrued from the government stimulus and the inability to spend on things like vacations when the economy was shut down.
“The consumer has been incredibly resilient, but we also know that a lot of the support has been artificial in nature,” said Lindsey Piegza, chief economist at investment bank Stifel Financial, who put the odds of a recession in the next year at about 60 percent.
The boost in consumer spending might not be “as short-lived as many of us had anticipated, but it’ll eventually run out,” she said. “The question is where’s the economy when that eventual run out of momentum occurs.”
But gauging exactly when consumers pull back significantly on their spending is difficult given all the changes the economy has experienced because of the pandemic, said Robert Triest, chair of Northeastern University’s economics department and a former vice president of the Federal Reserve Bank of Boston.
“Economists, including myself, have been wrong about how quickly the economy would slow in response to the Fed’s actions so far, so I think everyone is a little cautious now regarding how long the current [consumer] resilience is going to last,” he said.
Powell admitted that Fed officials might have underestimated the amount of money consumers had saved, which is difficult to track.
“Clearly people are still spending,” he said.
Strong job creation and wage increases that have outpaced inflation in recent months have helped fuel that spending, which in turn has created the consumer demand that leads to more hiring, Powell said.
Dynan, a former Treasury Department chief economist during the Obama administration, doesn’t expect consumers to continue their torrid spending.
“This was the most normal summer we had since COVID,” she said. “Everybody was trying to get their travel in, going to fantastic concerts, I think people were making up for lost time.”
Simply returning to more normal spending will cause economic growth to slow, although probably not enough to cause a recession, Dynan said. She put the odds of a downturn in the next year at 40 percent, but acknowledged it’s a tough call to make.
“All the uncertainty makes it harder than usual to predict the economy’s direction,” she said.