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The Economy’s Unexpected Strength Starts With the Labor Market

Other helpful factors: pandemic stimulus checks, unemployment benefits and a lack of spending, which means consumers and businesses have accumulated more in savings than if COVID-19 never happened.

By Lisa Ryckman  |  August 24, 2023

All signs pointed to a recession.

Unemployment was low, inflation was high, wages were rising, and the Federal Reserve was responding by raising interest rates, fast.

Economists like Veronica Clark, a forecaster for the global bank Citi, were sure the economy would start to contract.

“All the factors were lining up,” she told a session on the economy at NCSL’s 2023 Legislative Summit. “That strength wasn’t gonna last. We would be entering a recession in the second half of this year or early next year. And so far, that hasn’t happened. What have we gotten wrong?”

“We’ve more than made up for the jobs lost during the pandemic. The unemployment rate is at historically low levels, and we really haven’t seen it trend higher much at all.”

—Veronica Clark, Citi economist

Digging through the data, Clark unearthed some reasons for the curious and unexpected strength of the U.S. economy—starting with the labor market.

“Even sectors that have slowed down, we really haven’t seen that result in substantial job losses as we normally would. It’s around 200,000 jobs added a month right now. That is still a very healthy number,” Clark says. “We’ve more than made up for the jobs lost during the pandemic. The unemployment rate is at historically low levels, and we really haven’t seen it trend higher much at all.”

Wages have been rising faster than inflation, and inflation has been coming down, so people are going out and spending, she says—a fundamental driver of the economy. But the piece economists overlooked was the money consumers had socked away in their mattresses.

“Household balance sheets in general actually had a lot more firepower, even excluding the fact that everyone had a job,” she says.

Pandemic stimulus checks and unemployment benefits, coupled with a lack of spending, meant people were able to accumulate about $2 trillion more in savings than if COVID-19 had never happened. And it wasn’t just consumers, Clark says; business balance sheets have improved as well.

“I think this may be an underestimated underlying strength of the economy, because even as rates have gone up, we haven’t seen businesses have to cut back on costs, at least in terms of labor costs,” she says. “This is probably more fundamentally why we haven’t seen the layoffs that we would expect otherwise. Large corporations have locked in low interest rates on their debt, and small businesses benefited from pandemic relief.

“So even as rates have gone up, corporations are not very sensitive to that. Even small-business balance sheets have probably improved a good bit.”

Where Is the Plane Headed?

So, if the economy is a plane in flight, what kind of landing are we in for? Will it be soft and smooth, with little pain? A hard landing with plenty of bumps? Or will we just keep on cruising?

A soft landing would mean economic activity would slow down but not contract, Clark says.

“You’re rebalancing demands that were too strong, and you’re allowing supply time to catch up. And you have inflation that is coming back to 2%. We have had data over the last couple months that look pretty good in terms of soft landing.”

But there’s also a good chance the plane will just keep on flying.

“You would want to see wage growth slowing more to be convinced that inflation can come back to 2%,” Clark says. “And it’s just been too soon to know that is where we’re headed. So, I would still be a bit skeptical if we are getting to a true soft landing. It doesn’t look like it yet. But we absolutely admit that the data over the last couple months have been pretty positive. I would love to be proven wrong.”

Lisa Ryckman is the associate director of communications at NCSL.

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