The US economy is in uncharted waters as its rapid recovery from the coronavirus recession hits new hurdles.
The April jobs report released on Friday showed how strong the economy has remained two years after a stunning comeback from the biggest drop since the Great Depression. The economy added 428,000 jobs, beating economists’ expectations, with the unemployment rate remaining just 0.1 percentage point above pre-pandemic levels.
But the strong jobs report capped a week of growing concern among policymakers and investors about the long-term outlook for the US economy. The stock market suffered its worst day of losses since the start of the COVID-19 pandemic on Thursday as Wall Street braced for the Federal Reserve’s daunting battle with inflation. As stocks rose sharply following the Fed’s rate hike on Wednesday, the market slumped as investors processed the efforts the bank may have to make to lower prices, including a possible recession.
Here are five questions that will shape the course of the US economy.
Was April the peak of the post-pandemic labor market?
April extended a stellar period of job growth in the United States, even in the face of rising inflation, high gasoline prices and a decline in economic growth in the first quarter.
The United States has added more than 2 million jobs since the start of the year after a record gain of 6.5 million in 2021, less than 1.2 million jobs from pre-pandemic levels. The unemployment rate also held steady at 3.6%, although labor force participation fell slightly.
Economists expect the pace of hiring to slow as higher interest rates slow the economy and the United States is less than a million jobs away from filling the employment hole created in 2020. Even so, slower job growth would still be close to pre-pandemic patterns, leaving the economy in a strong position going forward.
“We expect that as the economy evolves, monthly growth and hiring will slow to more familiar long-term trends of around 2% growth for the economy and an increase of 200,000 hirings,” said said Joe Brusuelas, chief economist at the audit and tax firm. RSM.
How high should the Fed raise interest rates?
After a year of rapidly rising inflation, the Fed is stepping up its efforts to rein in price growth by raising interest rates at a faster pace.
The central bank raised its base interest rate range by 0.5 percentage points on Wednesday, twice the size of a typical rate hike, and Fed Chairman Jerome Powell said the bank would continue until inflation was well down from four-decade highs.
As the Fed raises borrowing costs, consumers will pay more interest on credit cards, auto loans, mortgages, and any credit product or debt with no fixed interest rate. Businesses will also face higher costs to borrow money and lower profits with which to invest and grow.
The ultimate goal is to slow the economy enough to bring prices down, but without causing layoffs or a recession. Although Powell has expressed confidence in the Fed’s ability to do so, some economists worry that the combination of a booming US economy and threats from abroad could make that impossible.
“The labor market remained strong in April. It’s a blessing and a curse,” wrote Diane Swonk, chief economist at Grant Thornton, in a Friday analysis. “Powell hoped he could derail inflation without a ‘significant’ increase in unemployment. Hope is not the same as reality.
Will the Fed get help from supply chains?
The main way the Fed fights inflation is by trying to reduce demand for goods and services, which should limit companies’ ability to keep raising prices.
But there is little the Fed can do to improve the supply of goods constrained by shortages, factory closures, port bottlenecks, COVID-19-related lockdowns in China, war in Ukraine and the slowdown in economic activity abroad.
While the Fed had hoped that supply chains would normalize in time to help lower inflation, the bank abandoned its patient approach. This means that the Fed may have to reduce demand enough to compensate for limited supply, which would likely lead to slower economic growth and employment.
“It’s been a series of inflationary shocks that are really unlike anything people have seen in 40 years. We have to look through that and look at the economy coming out the other side, and we have to kind of find price stability from that,” Powell said on Wednesday.
“It’s obviously going to be very difficult.”
When will the stock market stop selling?
The stock market has been falling steadily throughout 2022. This week, the selling has accelerated.
The Dow Jones Industrial Average and the Nasdaq composite suffered their worst day of losses since 2020 on Thursday, while the S&P 500 index suffered its second worst day of the year. All three major indexes are down more than 10% each since the start of 2022, with the S&P down 14% and the Nasdaq down 23%.
“There is great uncertainty in the market these days and it is difficult for many to see a positive path forward. Investors are confused (you are not alone!) and the market has become more volatile,” wrote Lindsey Bell, chief markets and currency strategist at Ally, in a Friday analysis.
While professional investors must ride the waves of the market, Bell and other investment experts say most Americans should hold their ground, avoid panic-selling from retirement accounts, and stick to a long-term investment strategy. People close to retirement may have more difficult decisions to make based on when they plan to leave the workforce and how much money they will need to maintain their lifestyle.
“The uncertainties seem to outweigh the positives these days, and markets could remain rocky until clearer skies prevail. Sticking to your long-term strategy is the most important thing right now. Liquidations don’t last forever and market setbacks are usually followed by possible recoveries,” Bell said.
Will consumers continue to bear high prices?
Consumer spending has risen steadily, even when adjusted for inflation, despite rising prices for food, fuel, housing, clothing, health care, transportation and almost everything else. that the government can follow.
Personal consumption expenditure, a measure of consumer spending, rose another 1.1% in March, and while the gain was just 0.2% after adjusting for inflation, the resilience of consumer spending consumption exceeded economists’ expectations.
As the economy continues to add jobs and consumers bear the costs of inflation, some economists are more optimistic about the United States’ ability to handle rising rates.
“With inflation still at a 40-year high and the Fed lagging policy, interest rates will continue to rise over the coming months. This further tightening should continue to weigh on investors. markets”, said Noah Williams, assistant research fellow at the Manhattan Institute, in a Friday analysis.
“While a legendary ‘soft landing’ of slowing inflation without tipping the economy into recession may be a difficult task, today’s jobs report gives hope that there is a certain landing margin.”
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