The U.S. economy has yet to face its biggest recession challenge

There is no historical precedent to indicate that an economy in recession can produce 528,000 jobs in a month, as the U.S. did during July. A 3.5% unemployment rate, tied for the lowest since 1969, is not consistent with contraction.

But that doesn’t mean there isn’t a recession ahead, and, ironically enough, it is the labor market’s phenomenal resiliency that could pose the broader economy’s biggest long-run danger

The Federal Reserve is trying to ease pressures on a historically tight jobs situation and its rapid wage gains in an effort to control inflation running at its highest level in more than 40 years.

The inflation surge and fear of a recession have eroded consumer confidence and stirred public anxiety about the economy, which is sending frustratingly mixed signals.

And with the November midterm elections nearing, Americans’ discontent has diminished President Joe Biden’s public approval ratings and increased the likelihood that the Democrats will lose control of the House and Senate.

Consumer spending is still growing. But Americans are losing confidence: Their assessment of economic conditions six months from now has reached its lowest point since 2013, according to the Conference Board, a research group.

Recession risks have been growing as the Fed’s policymakers have pursued a campaign of rate hikes that will likely extend into 2023.

The Fed’s hikes have already led to higher rates on credit cards and auto loans and to a doubling of the average rate on a 30-year fixed mortgage in the past year, to 5.5. Home sales, which are especially sensitive to interest rate changes, have tumbled.

Small manufacturers are also facing headwinds, as are financial services and tech firms. Wall Street firms and banks have reported shrinking earnings, laying the groundwork for upcoming layoffs.

Firms in the tech industry, facing constrained capital, have already laid off tens of thousands of workers. The services industry has slowed.

In the first three months of the year, the US economy shrank at an annual rate of 1.6%. At the time, economists attributed the decline in gross domestic product (GDP) to quirks in trade data.

But Thursday’s report showed more marked slowdown, with growth weighed down by declines in the housing market, business investment and government spending.

Consumer spending grew at a slower annual rate of 1%, as people spent more on healthcare, accommodation and dining out, but cut back on goods and groceries.

On Wednesday, the US central bank responded to the problem with another unusually large increase to its key interest rate, its second 0.75 percentage point rise since it started raising rates in March.

By making borrowing costs more expensive, the Federal Reserve is hoping to reduce spending on items such as homes and cars, in theory easing some of the pressures putting up prices. But lower demand also means a decline in economic activity. 

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