The US economy continues to defy the recession forecasts that received much attention in the summer. The primary drivers of the economic resilience: strong growth in payrolls and consumer spending. By contrast, industrial production, after a strong start once the pandemic recession ended, has faltered recently. Meanwhile, the revival of personal income has suffered one of its weakest runs during economic expansions since 1970.Despite this mixed picture, the economic outlook remains upbeat, according to a new survey of economists published by The Wall Street Journal: “Forecasters are increasingly upbeat about the economy’s prospects.” The average forecast for the upcoming GDP report for the third quarter: +2.4%. Although that’s moderately below Q2’s +3.0%, a 2%-plus rise in output (if correct) is a respectable gain that minimizes the odds that a recession is near.The resilience of the economy can be seen by the unusually strong rebound in employment from the start of the current expansion, which began in May 2020, according to NBER. As the chart below indicates, the rise of US non-farm payrolls since May 2020 has dramatically exceeded hiring trends during every previous expansion since 1970. A key explanation for the strong snap-back is the depth of the pandemic contraction, and the fact that it unfolded swiftly. In any case, the labor market’s revival has been unusually strong and is a crucial reason why the economy continues to grow.
A similarly impressive story applies to consumer spending, based on personal consumption expenditures. The sharp recovery has been crucial source of economic resilience. The strength of spending has started to slow, but relative to previous expansions the consumer sector remains relatively robust.
Personal income, by contrast, has been unusually weak during the current expansion. At this stage of the business cycle, only one previous recovery path was weaker. That’s a warning flag that deserves monitoring because it suggests that the robust pace of consumer spending may be vulnerable.
Finally, the recovery in industrial output, after a strong start, has been flatlining over the past couple of years. The optimistic spin is that the US is increasingly a services-oriented economy and so industrial activity matters less. Perhaps, but economists will continue to debate if the waning of industrial activity marks a warning sign for the near-term outlook and US economic resilience generally.
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