Famous financial journalist Nick Timiraos, also known as the "New Fed Communications Agency", said in his latest article on Friday that the unanimous expectation of business executives, economists, and investors to date has been that the US economy is not in recession yet. Of course, those who predicted that the US economy would decline were wrong before, but that doesn't mean they won't eventually be right.

Timiraos believes that the recession in the US economy caused by the new crown epidemic four years ago was essentially extremely unusual, and the radical policy response that followed is the fundamental reason why the US economy has shown astonishing resilience so far.

Preview of the June FOMC meeting of the Federal Reserve

The theme of Timiraos's latest article is why the US economy has not yet declined. While analyzing this theme, he also gave his predictions for the June FOMC meeting of the Federal Reserve next week.

He said that officials of the Federal Reserve are expected to maintain the benchmark interest rate of 5.25%-5.5% unchanged at the next FOMC meeting next week, which is the highest level since 2001. Although the Bank of Canada and the European Central Bank have begun to cut interest rates, the economic growth of the United States is stronger.

The Federal Reserve is trying to find a balance between two risks: On the one hand, premature interest rate cuts may cause stubborn inflation to persist, and on the other hand, maintaining high interest rates may trigger unnecessary economic slowdowns:

Looking ahead, the Federal Reserve must deal with two risks. One is that the seemingly normalizing economy coming out of the epidemic will eventually weaken further and eventually fall into the long-predicted recession. The second risk is that if the Federal Reserve turns to interest rate cuts to prevent economic weakness, it will instead reignite economic activity and asset prices, leading to inflation maintaining a level higher than the Federal Reserve's 2% target.

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

At the last meeting, Federal Reserve officials were puzzled why their interest rate policy did not slow the economy more. After three medium-sized banks in the United States went bankrupt last year, economists at the Federal Reserve added recession to their forecasts submitted to rate policy makers every six weeks, which is extremely rare. After the bank pressure eased in July last year, they no longer predict a recession.

The US economy is not in recession- labor market.

Timiraos pointed out that stable recruitment continues to boost consumer spending, thereby promoting the expansion of the US economy, which has never happened before in the US economy.

The following labor market data was listed in the article:

The latest data from the US Department of Labor on Friday showed that the country added 272,000 non-agricultural jobs in May, and employers have cumulatively added 2.75 million jobs in the past 12 months.

The US unemployment rate has been below 4% for 30 consecutive months, the last time the unemployment rate was so low was in the late 1960s and early 1950s.

Although the current unemployment rate in the United States is still low, it has risen from the extremely low level after the new crown epidemic: the unemployment rate in May was 4%, higher than 3.9% in April, and once reached a low of 3.4% in April last year.

The speed at which enterprises employ workers has dropped to the level of seven years ago. The surge in job vacancies during the new crown epidemic has also returned to pre-epidemic levels.

The article also lists changes in recruitment modes in some markets affected by the epidemic:

Since some industries are still trying to restore employment to pre-epidemic levels, the duration of strong employment growth lasts longer than expected. For example, in the past two years, the leisure and hotel industry has added 1.3 million jobs, but it is still about 1 million lower than the long-term trend.

Originally difficult to recruit, now it is slow to lay off. In the past few years, some enterprises have experienced recruitment difficulties due to a large number of early retirements, so they are even more unwilling to lay off employees during an economic downturn.

Overall, so far, the imbalance in the US labor market has been resolved on its own, and it is without the occurrence of an economic recession.

However, looking into the future, the article mentioned that

If job vacancies decrease significantly, then unemployment rate will increase.

If companies do not lay off employees, but interest rates stay high for a longer period of time, it will erode profit margins and cause profits to decline, which will increase pressure to lay off employees in the future.

Two years ago, the Fed raised interest rates at the fastest pace in decades to combat what was initially believed as potentially short-lived inflation. Companies scrambled to hire employees, offered large salary increases and bonuses, and prices soared. Investors, economists, and some Fed officials believed that it might take a higher unemployment rate to restore supply and demand equilibrium.

The US economy has not suffered a recession - the private sector is strong.

When the Fed began raising interest rates, the balance sheets of the private sector were unusually strong. Many households and businesses locked in ultra-low borrowing costs after the Fed's historic interest rate cuts, avoiding the impact of subsequent rate hikes on them.

Usually during the recovery period when the economy emerges from a recession, households become more cautious in their spending and tend to save more. Lower interest rates support borrowing for consumption, while high interest rates suppress it.

But this time is different, economic activity is more supported by wealth and income rather than credit expansion. The pandemic has changed consumer habits, coupled with rising asset prices, good job prospects, and government stimulus policies, more households feel financially comfortable.

Surveys have shown that since the pandemic broke out, consumers' confidence has declined, but their large spending reflects the opposite. People feel more confident, so for every additional dollar of income and net wealth, they tend to spend more. Over the past three years, the ratio of household net worth to income is higher than at any time before the pandemic.

After the US economy suffered a downturn in 2001 and 2008, asset prices fell, but not this time. Although there was a brief decline in early 2020, the soaring US stock market and housing prices promoted consumption by high-income consumers.

On the other hand, low-income consumers have exhausted their savings during the pandemic and have begun to rely on credit card borrowing. Under the impact of high interest rates, their payment delinquency rates have risen, and discount retailers have reported weakening demand.

US government expenditures take over the baton.

When the Fed's interest rate hikes threaten to affect employment in housing and manufacturing industries that are sensitive to interest rates, new US government spending on infrastructure, computer chips, and battery factories has taken over the baton.

Additional US government spending 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% compared to the same period last year.

Robert Kaplan, Vice Chairman of Goldman Sachs and former President of the Dallas Federal Reserve, said that the impact on the labor market is a prelude, which occurs when the infrastructure bill or the Inflation Reduction Act is announced, even if fiscal spending does not occur immediately.

Furthermore, many of these projects may attract workers who have transferred from low-wage service positions, further increasing demand, such as for child care services or restaurant meals.

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

Timiraos also mentioned that some medium-sized market companies may have encountered trouble, but were acquired by private equity firms. This group is more experienced and knows how to engage in distressed debt transactions to protect their value, so they can barely maintain their position.

Compared with Europe, the number of bankruptcies of US companies has decreased more, and the number of new companies has increased significantly, which also promotes employment growth. According to the Fed's research, as of the end of last year, the number of newly registered companies in the US increased by 53% compared to four years ago, while in Europe it only increased by 8%.

New immigrants.

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

Not all days are peaceful.

Timiraos pointed out that nothing demonstrates the exceptional situation during the pandemic period in the United States more than the real estate market. The average interest rate of 30-year mortgage loans in the United States is currently hovering around 7%, compared to only 3% for the same period three years ago. The high interest rate not only affects demand but also suppresses supply. Many homeowners who do not have a mortgage or have locked in low rates are unwilling to move.

However, according to loan data from the Intercontinental Exchange, the average interest rate for unpaid mortgage loans in the United States in April was 4.1%, which is not much different from 3.9% three years ago.

Because of the extremely low volume of listings in the secondary housing market, home builders have benefited. But the inventory of new homes has risen to the highest level in more than a decade in the past few months, highlighting potential weaknesses. Higher interest rates also mean higher costs for builders holding inventory.

The traditional real estate market in the spring of this year was disappointing, although buyers were more willing to make deals than last year. The market is still very slow, and industry insiders say that the current number of buyers has almost reached its lowest point.

The US economy also faces risks from industries that have not prepared for high interest rates. These industries hope that the Federal Reserve can quickly control inflation and lower interest rates. The worst-hit area is investors and lenders in the commercial real estate market, including small and medium-sized banks, who may begin to face greater losses if rates do not fall quickly.

In addition to the impact on office buildings themselves due to the transition to mixed office models, commercial real estate is also impacted by refinancing. Owners of billions of dollars of office building debt that expired last year are extending their loans by about a year. Many of these properties have declined in value, and they are refinancing loans they took out in 2020 or 2021 at close to 7% interest rates to loans with a 3% interest rate.

Randal Quarles, who served as Vice Chairman for bank supervision at the Federal Reserve from 2017 to 2021, said:

If the interest rates remain at this level, some people will not be able to hold on.

However, on the other hand, Quarles said that the Federal Reserve's rapid increase in interest rates froze many debtors' debts, which may actually prolong the time needed to slow down economic activity under high interest rates. Because companies that are least prepared and most susceptible to the impact of high interest rates are simply delaying their responses as much as possible.

In the next few years, there will be billions of dollars of corporate bonds and loans due every year, but for companies with unsustainable debts, refinancing is meaningless if they believe that interest rates will drop soon. They will postpone acceptance as long as possible in any way they can.

Glenn Kelman, CEO of Redfin, said:

"If you compare the economy to climbers on a ridge, sometimes the ridge is very wide, and even major events won't knock the economy off the ridge. 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 report that price increases have encountered greater resistance, including Starbucks, McDonald's, and Kraft Heinz. At the same time, cruise companies reported record bookings. Industry insiders mentioned that consumers say they don't plan to buy a $10 fast food cheeseburger, but really want to go on a six-day cruise.