Five questions shaping a confounding US economy

The U.S. economy is in uncharted waters as its rapid recovery from the coronavirus recession runs into new obstacles. 

The April jobs report released Friday showed just how strong the economy has remained two years into a stunning comeback from the steepest decline since the Great Depression. The economy added 428,000 jobs, beating economists’ expectations, as the jobless rate remained just 0.1 percentage points above pre-pandemic levels.

But the solid jobs report capped off a week of deepening concern among policymakers and investors about the longer-term prospects of the U.S. economy. The stock market suffered its worst day of losses since the onset of the COVID-19 pandemic on Thursday as Wall Street braced for the Federal Reserve’s daunting battle against inflation. While stocks rose sharply in the wake of the Fed’s rate hike Wednesday, the market tanked as investors processed the lengths the bank may need to go to bring prices down — including a potential recession.

Here are five questions that will shape the course of the U.S. economy.

Was April the peak for the post-pandemic labor market?

April extended a stellar stretch of U.S. job growth even in the face of rising inflation, high gas prices and a decline in economic growth during the first quarter.

The U.S. has added more than 2 million jobs since the start of the year after a record-breaking gain of 6.5 million in 2021, coming within 1.2 million jobs of pre-pandemic levels. The unemployment rate also held strong at 3.6 percent, though labor force participation declined slightly.

Economists expect the pace of hiring to decline as higher interest rates slow the economy and the U.S. comes within 1 million jobs of filling the employment hole created in 2020. Even so, slower job growth would still be close to pre-pandemic patterns, leaving the economy in a strong position going forward.

“We expect that as the economy evolves, both growth and monthly hiring will slow to more familiar long-term trends of around 2 percent growth for the economy and increases of 200,000 in hiring,” said Joe Brusuelas, chief economist at audit and tax firm RSM.

How high will the Fed need to hike interest rates?

After a year of rapidly rising inflation, the Fed is ramping up its efforts to curb price growth by raising interest rates at a faster pace.

The central bank hiked its baseline interest rate range by 0.5 percentage points Wednesday, twice the size of a typical rate increase, and Fed Chair Jerome Powell said the bank will keep going until inflation is well on its way down from four-decade highs.

As the Fed hikes borrowing costs, consumers will pay more in interest on credit cards, auto loans, mortgages and any credit product or debt without a fixed interest rate. Businesses will also face steeper costs to borrow money and smaller profits with which to invest and expand.

The ultimate goal is to slow the economy enough to bring prices down, but without causing layoffs or a recession. While Powell has expressed confidence the Fed can do so, some economists fear the combination of a hot U.S. economy and threats from abroad will make it impossible.

“The labor market remained strong in April. That is a blessing and a curse,” wrote Diane Swonk, chief economist at Grant Thornton, in a Friday analysis. “Powell was hopeful that he could derail inflation without a ‘significant’ increase in unemployment. Hope is not the same as reality.”

Will the Fed get any help from supply chains?

The primary way the Fed fights inflation is by trying to reduce demand for goods and services, which should limit the ability of businesses to keep raising prices.

But the Fed can do little to improve the supply of goods limited by shortages, factory shutdowns, port bottlenecks, COVID-19-related lockdowns in China, the war in Ukraine and slowing economic activity abroad.

While the Fed had hoped supply chains would normalize in time to help bring inflation down, the bank has given up on its patient approach. That means the Fed may need to reduce demand enough to compensate for a limited supply, which would likely lead to slower economic and job growth.

“It’s been a series of inflationary shocks that are really different from anything people have seen in 40 years. We have to look through that and look at the economy that’s coming out the other side, and we need to somehow find price stability out of this,” Powell said Wednesday. 

“It’s obviously going to be very challenging.”

When will the stock market stop selling off?

The stock market has fallen steadily throughout 2022. This week, the sell-off kicked into overdrive.

The Dow Jones Industrial Average and Nasdaq composite suffered their worst day of losses since 2020 on Thursday, while the S&P 500 index suffered its second-worst day of the year. All three major indexes are down more than 10 percent each from the start of 2022, with the S&P down 14 percent and the Nasdaq down a stunning 23 percent.

“There is a significant amount of uncertainty in the market these days and it’s hard for many to see a positive path forward. Investors are confused (you aren’t alone!) and the market has become more volatile,” wrote Lindsey Bell, chief markets and money strategist at Ally, in a Friday analysis.

While professional investors must ride the waves of the market, Bell and other investment experts say most Americans should hold tight, avoid panic-selling from retirement accounts, and stick to a long-term investment strategy. Those close to retirement may have harder decisions to make depending on when they plan to leave the job market and how much money they will need to maintain their lifestyle.

“”The uncertainties seem to outweigh the positives these days, and markets could remain rocky until clearer skies prevail. Keeping with your long-term strategy is the most important thing right now. Sell-offs don’t last forever, and market setbacks are typically followed by eventual recoveries,” Bell said.

Will consumers keep powering through high prices?

Consumer spending has risen steadily, even when adjusted for inflation, despite rising prices for food, fuel, housing, clothes, health care, transportation and almost everything else the government can track.

Personal consumption expenditures, a measure of consumer spending, still rose 1.1 percent in March, and while the gain was only 0.2 percent when adjusting for inflation, the resilience of consumer spending beat economists’ expectations.

As the economy continues to adds jobs and consumers are bearing the costs of inflation, some economists are more optimistic the U.S. can handle rising rates.

“With inflation continuing at 40-year highs, and the Fed being behind the curve on policy, interest rates will continue to rise for the next several months. This further tightening should continue to weigh on markets,” said Noah Williams, an adjunct fellow at the Manhattan Institute, in a Friday analysis.

“While a fabled “soft landing” of slowing inflation without tipping the economy into recession may be a difficult task, today’s jobs report gave hope that there is some landing room.”