America's Economy Isn't Out of the Woods

The U.S. economy is yet to completely escape the possibility of falling into a recession despite growing at a better-than-expected pace last year and trends that show consumers are still spending at a healthy clip, Wells Fargo economists said recently.

The economy accelerated at a 3.3 percent rate at the end of the year, above forecast, while consumer spending, a key component of how healthy the economy is, shot up in December, the Commerce Department said last week.

But Wells Fargo pointed to other indicators that may suggest that the impact of tight monetary conditions instituted by the Federal Reserve to fight inflation, that at one point hit four-decade highs, are slowing certain sectors of the U.S. economy.

They point to recent data from the Federal Reserve Bank of Richmond, which showed manufacturing-sector sentiment in the Mid-Atlantic Region had dropped to its lowest level since spring 2020. Meanwhile, business activity has also slowed, according to The Federal Reserve Bank of Philadelphia, and the Leading Economic Index is indicating a recession.

"Monetary policy is still pretty restrictive at this point," Jay Bryson, Wells Fargo's chief economist, told Newsweek. "We do think that that will put some sort of headwinds on consumer spending growth."

Bryson suggested that the first quarter may see continued growth, borrowing from the momentum seen toward the end of 2023, but that further into the year the economy is likely to cool as the effects of high interest rates continue.

"In the fourth quarter, business fixed investment spending grew but it was at a very, very subdued rate...of somewhere between one or two percent," Bryson said. "In general, those things will cause growth to ratchet down a little bit."

Wells Fargo analysts said the labor market would be a key indicator to focus on when looking at whether the economy might be heading toward a recession. In 2023, the jobs market proved resilient as employers kept hiring and retained their workers despite the high cost of borrowing, which slowed business investment.

Bryson suggested that business investment spending may flatten but government spending is likely to continue albeit at a slower pace through the year. This dynamic will keep the labor market going and keep getting Americans paid, which will keep consumer spending up, which will fuel the economy.

But if something shocks the system to deter hiring, that may arrest the growth of consumer spending that could plunge the economy into a recession. Nevertheless, the expectation is that consumer spending will likely slow over the next 12 months compared to the rates seen last year, which will likely keep the economy growing but at a less quicker pace from what the country witnessed in 2023.

"I think it's more likely than not that you don't have a recession, that we do have a soft landing," Bryson said, referring to a scenario where amid high interest rates, the economy slows but does not go into a recession as inflation moderates.

A soft landing will likely spur the Federal Reserve to cut rates, which could buoy the economy going forward.

Bryson told Newsweek that the current tight monetary conditions, though, keep the probability of a recession over the next year at about 15 percent.

"I would say, though, I don't think the U.S. economy is out of the woods or completely out of the woods just yet," Bryson said. "But our view is that you probably are not going to have a recession."