Here is the excellent news concerning the U.S. economic system proper now: Regardless of a wave of high-profile layoff bulletins, most staff are nonetheless employed. Final week, the Bureau of Labor Statistics reported that the variety of individuals submitting for unemployment advantages fell to a nine-month low of 186,000. The unemployment charge stays at 3.5%, the bottom in a half-century. And there are about 10.5 million job openings.

But many economists consider we’re heading for some kind of financial recession. It simply may not appear like the recessions we have beforehand skilled within the U.S.

“I feel the traits of this recession are prone to be totally different than prior ones,” stated Gregory Daco, the chief economist at Ernst and Younger’s EY-Parthenon consulting group. He cited two causes: the state of family funds, like wholesome financial savings charges and comparatively low ranges of debt, and demand for labor, which continues to be resilient.

“So we now have not seen the kind of extreme pullback we normally see on the onset of a recession, the place companies look to chop prices quickly,” he stated. “So the pullback is prone to be softer and extra gradual than prior to now. We’re not going to see broad-based layoffs.”

Why, then, might the U.S. nonetheless be marching towards a recession? Daco stated shopper spending ranges seem to have peaked a number of months in the past. As well as, individuals have begun working fewer hours, and manufacturing exercise has begun to tug again.

“So throughout the economic system there are extra indications that the economic system is slowing down materially, and that’s usually the signal of the onset of a recession,” Daco stated.

The information of a slowdown is, not less than thus far, being met with some aid amongst some observers. That is as a result of it is a sign that an financial “mushy touchdown,” during which the breakneck charge of inflation for a lot of final yr seems to be getting extinguished with out a fast and expansive rise in unemployment.

Federal Reserve officers have made it very clear that that’s a part of their goal to tug again on inflation, which reached as excessive as 9% on an annualized foundation final summer season. For practically a yr, the central financial institution has leaned into an aggressive marketing campaign to lift rates of interest to gradual the rise of shopper costs.

Fed Chair Jerome Powell himself was unabashed final yr about taking these measures.

“I simply assume that the inflation image has change into increasingly difficult over the course of this yr, with out query,” Powell stated at his month-to-month information convention in November. “That signifies that we now have to have coverage be extra restrictive, and that narrows the trail to a mushy touchdown.”

What’s it going to take?

Michael Antonelli, a managing director and personal wealth supervisor on the monetary providers firm Baird, stated that to get a mushy touchdown, inflation must fall considerably, company earnings must maintain up, and the job market must keep sturdy.

The chances of sticking that “touchdown” are going to be robust — however not unimaginable — Antonelli stated.

“A mushy touchdown is a protracted shot by any chance — it is by no means actually occurred earlier than,” he stated. “Any time inflation has been this excessive, we now have a recession to deliver it below management. There aren’t loads of historic analogies for a soft-landing situation.”

Many economists agree that the U.S. is, for now, not in a recession. The newest gross home product report revealed final week confirmed the U.S. economic system grew by 2.9% within the fourth quarter of 2022, following progress of three.2% within the quarter earlier than. That is greater than sufficient to beat one technical definition {that a} recession equals two consecutive quarters of unfavorable progress.

However the identical economists nonetheless foresee a “gentle” recession’s hitting quickly.

“The combo of progress was discouraging, and the month-to-month information recommend the economic system misplaced momentum because the fourth quarter went on,” Andrew Hunter, a senior U.S. economist for Capital Economics, wrote of the most recent GDP report. “We nonetheless anticipate the lagged influence of the surge in rates of interest to push the economic system into a light recession within the first half of this yr.”

In reality, the economic system could now be in a candy spot. Julia Pollak, the chief economist at the net employment market ZipRecruiter, sees encouraging indicators that the economic system is in, or is heading towards, some extent the place inflation is coming down rapidly “with out an enormous financial value,” like greater unemployment.

“We could now be on the cusp of a scenario the place wage progress goes to be quicker than inflation for the foreseeable future and customers get actual wage will increase after two years of actual wage declines,” she stated.

Paradoxically, it could find yourself being the Federal Reserve itself that pushes the economic system into recessionary territory, Pollak stated. On Wednesday, the Fed will announce its newest rate of interest choice. If it raises charges by one other half-point, because it did in December, it’ll sign to markets that it stays involved about inflation — whilst buyers elsewhere have indicated they continue to be happy with the present tempo of slower value progress.

“The large danger is that the Fed could not acknowledge [a price-growth slowdown] quickly sufficient or that it is too anxious and be too aggressive and overshoot,” Pollak stated.

If charges go greater than markets anticipate, she stated, “that may trigger some extent of panic and consternation and will decelerate main expenditures and investments sufficient to trigger extra ache within the labor market.”

One factor is for certain: The U.S. economic system is a big, sophisticated machine that may typically defy expectations. And the levers the Federal Reserve makes use of to fine-tune that equipment are imperfect, so, even with the Fed’s clearly outlined plans, it is anybody’s guess precisely how the economic system will reply to its maneuvers within the close to time period.