Jobs are up! Wages are up! So why am I as an economist so gloomy?

So where does this leave the possibility of further rate hikes? Viewing this as an economist, it suggests that the Fed might be eyeing a base rate jump of more than 75 basis points on Dec. 13, rather than a softening of its policies as Chair Jerome Powell had suggested as recently as Nov. 30. Yes, this still would not ease the labor supply problem that is encouraging wage growth, but it might serve to cool the wider economy nonetheless.

The problem is, this would increase the chances of also pushing the U.S. economy into a recession – and it could be a pretty nasty recession.

Wage growth still trails behind inflation, and for one reason or another people have been opting out of the labor market. The logical assumption to make is that to make up for both these factors, American families have been dipping into their savings.

Statistics back this up. The personal saving rate – that is, the chunk of income left after paying taxes and spending money – has fallen steeply, down to 2.3% in December from 9.3% before the pandemic. In fact, it is at its lowest rate since 2005.

So, yes, employment is robust. But the money being earned is eroded by soaring inflation. Meanwhile, the safety net of savings that families might need is getting smaller.

In short, people are not prepared for the recession that might be lurking around the corner.

And this is why I am gloomy.

This article is republished from The Conversation, an independent nonprofit news site dedicated to sharing ideas from academic experts. It was written by: Edouard Wemy, Clark University. If you found it interesting, you could subscribe to our weekly newsletter.

Edouard Wemy does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.