This research was published on October 7, 2022

The U.S. economy, though clearly facing a growing risk of recession, continues to exhibit remarkable strengths, particularly in the labor market, as illustrated by continued job creation and another drop in the unemployment rate in the September 2022 jobs report.

Yet, right now that strength is a curse more than a blessing. With every sign of strength, it will get harder to rein in persistent and broad-based inflation without the Fed raising rates to levels that make a recession inevitable. And the risk is not linear: Though inflation is high today, expectations of long-term inflation are still modest. For nearly 40 years, we’ve lived in an era of structurally anchored inflation, where inflation doesn’t move much within the business cycle. If expectations unanchor, the cost would be far higher than a downturn — it would be an era of higher volatility and a less favorable business environment.

The current constellation of macroeconomic signals is unique, with many signs of strength coexisting with weaknesses. That limits the usefulness of models and predictions, and it forces executives to closely analyze cyclical momentum — and to think through the next downturn and the risks and opportunities it holds.