A year ago Bloomberg predicted with 100% certainty that the United States would go into recession. The US economy defied this prediction, growing at a 4.9% annual rate in the third quarter (or 1.2% actual rate), a phenomenal showing that is nearly triple what is believed to be the economy's underlying potential growth rate. American consumers led the way, increasing their spending at a 4% annual rate. These are the same American consumers that kept the US economy out of recession over the last year and a half – continuing to spend enough to offset any contractionary effects of the Federal Reserve's policies on the housing sector and other parts of the economy.

The labor market is very strong as well. The unemployment rate has been at about a 50-year low, jobs are about 2 million higher than pre-pandemic forecasts and labor force participation rates continue to rise. After wages were failing to keep up with inflation for much of 2021 and 2022, they have risen faster than inflation this year and are beginning to catch up with where they otherwise would have been.

The biggest pain point in the economy has been inflation but that has gotten better, or at least less bad. The 12-month inflation rate fell from a peak of 9.1% to 3.7% over the last 12 months, the lowest rate among the G7 economies. Moreover, these 12-month data present an outdated view of the pace of inflation – measured over the last three months the underlying pace of inflation is considerably lower.

All of this makes it remarkable how negative households are about the economy. The economic approval rating for President Joe Biden is very low and consumer sentiment is around the same level it was in 2009, at a time when the US was in the depths of recession with a 10% unemployment rate. Perhaps consumers are reacting to non-economic news, like immigration or crime. Perhaps they are concerned about the high level of prices or high mortgage rates. But another possibility is that they are not nearly as pessimistic as they claim to be – after all for some reason they keep spending money.

Huge investments

If the economy stays good then I would expect people would eventually realize it and approval of the economy would grow. The problem is that although the path to a soft landing has gotten wider it still will be hard to avoid either the Scylla of recession or the Charybdis of continued inflation. Recession risks may not be especially elevated but there is always a chance and history shows that strong recent growth is no guarantee against a rapid deterioration. Events around the world plus the recent tightening of financial conditions in the United States are all at least some cause for concern. No one expects anything like the recent rapid pace of growth to continue.

You have 40% of this article left to read. The rest is for subscribers only.