A much predicted U.S. recession still hasn't happened thanks to consumers

By Jeffry Bartash

"The 'R word' that one should use when discussing the American economy over the past two years should be resilient, not recession"

There's a funny thing going on in the economy. Business are pessimistic, but consumers are confident enough to keep spending -- and keep the U.S. out of recession.

A first-quarter breakdown of gross domestic product data underscores the diverging views of businesses and households, the two biggest pegs of the U.S economy.

Consumer spending rose at a robust 3.7% annual pace to mark the fastest increase in almost two years. That's the good news.

The bad news? Business outlays fell for the fourth quarter in a row and the production of unsold goods, or inventories, rose at the slowest rate since early in the pandemic in 2020.

What's going on?

Let's start with consumers. They are enjoying the best jobs market in decades, for one thing. The unemployment rate is near a 54-year low and most people who want a job can find one.

Incomes are also rising rapidly in light of fierce competition for labor, though not quite enough to keep up with inflation.

What this means is that households have money to spend, and they are spending it. So long as unemployment remains low, that's likely to continue to be the case.

There has been one notable change in consumer spending, though.

Americans are spending relatively more on services such as travel and recreation than they are on goods, a reversal of what happened in the first few years of the pandemic.

Reduced demand for goods partly explains the more pessimistic view of business leaders, particularly among manufacturers. They've trimmed production to cope with slower sales of big-ticket items such as appliances or consumer electronics.

That's not the whole story, some economists point out.

They note that companies overordered last year in anticipation of ongoing supply shortages and delays in deliveries that bedeviled the global economy since 2021. Now these shortages have almost evaporated and businesses are getting their inventory levels back in line.

So what happens next? It might all depend on consumers.

If they worry about a recession and cut their own spending, businesses are likely to further reduce production -- and jobs. The resulting downward spiral would almost certainly trigger a recession.

Yet if households keep spending at current levels, businesses could increase production a bit and avoid the need to lay off lots of workers. That would help keep a recession at bay.

To be sure, many economists still predict a recession later this year.

They point to a rapid rise in U.S. interest rates as the Federal Reserve battles to slay high inflation. Higher rates depress consumer and business spending and usually spawn a recession.

Yet a sizable number still think a downturn might be avoided. The reason? You guessed it. Steady consumer spending.

"Remember, first the recession was going to start late last year. Then earlier this year. Now later in the year," said Richard Moody, chief economist at Regions Financial.

Moody himself thinks the economy is headed for a period of very slow growth, but he's not convinced that a recession is inevitable.

Joe Brusuelas, chief economist at RSM, said businesses clearly expect households to throw in the towel this year and pave the way for the much talked about but still elusive recession. Yet he also points out the worst fears have repeatedly failed to materialize.

"The 'R word' that one should use when discussing the American economy over the past two years should be resilient, not recession."

-Jeffry Bartash

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04-27-23 1203ET

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