Fear of Recession Recedes; Here's What Janet Yellen Thinks

Nonfarm payrolls soared 517,000 in January, while the unemployment rate dropped to a 53-year low of 3.4%.

For much of last year, many economists saw a high probability of recession, as the Federal Reserve lifted interest rates significantly to stamp out inflation.

The worry was that the Fed would wipe out economic growth in addition to inflation.

The Harvard economist Larry Summers noted that that every time in the past 65 years that inflation stood above 4% and unemployment stood below 5%, recession followed within two years. Those thresholds were met last year.

But with economic numbers holding up well in recent months, the fear of recession is receding. The economy grew 2.9% annualized in the fourth quarter.

And the government reported Feb. 3 that nonfarm payrolls soared 517,000 in January, while the unemployment rate dropped to a 53-year low of 3.4%.

Janet Yellen Doesn’t Foresee Recession

One economist who doesn’t expect a recession is Treasury Secretary Janet Yellen. “We have a strong and resilient economy,” she said on ABC’s "Good Morning America."

"You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years.”

She expects inflation to “decline significantly” and the economy to “remain strong. That’s the path I believe is possible.”

Inflation already has slid over the past six months, Yellen noted, though “it remains too high.” The consumer price index rose 6.5% in the 12 months through December, after peaking at 9.1% in June.

The strong hiring in January could spark consumers to spend more, as the newly  hired have more money to spend. Consumer spending accounts for more than two-thirds of U.S. gross domestic product.

Consumers are “certainly on better footing than we or anyone thought just a few days ago,” Tim Quinlan, senior economist at Wells Fargo, said after the employment numbers, according to Bloomberg.

“If hiring remains strong, and inflation continues to go from high and rising to high and falling, then there’s an increasingly viable path toward a soft landing, where real consumer income is driving spending rather than a drawdown of saving.” A soft landing means a reduction in inflation without a recession.

Of course, it’s difficult to know whether the January jobs numbers are an aberration or a sign of a strong trend. Payrolls gained 290,000 in November and 260,000 in December.

Summers Is Encouraged but Wary

Harvard’s Summers, a former treasury secretary, says a soft landing would represent the “triumph of hope over experience.” But occasionally that does happen, he told CNN.

His fear is that while inflation has moderated, “it is still too high – unimaginably high from the perspective of two to three years ago.” That’s when it was 2% and below.

Getting the rest of the way back to the Fed’s target inflation rate of 2% “may prove to be quite difficult,” Summers said. “I’m encouraged, but it’s a big mistake to think we’re out of the woods.”