Paychecks have grown rapidly as businesses have struggled to deal with widespread labor shortages during the pandemic. As a result, firms have had to raise wages to attract and retain more workers, but that has also put pressure on inflation, since businesses have passed on some of those cost increases by raising prices for consumers.

Wage gains are starting to slow, though. While that might seem like bad news for workers, it could be an encouraging sign for Federal Reserve officials who have said they want to see growth return to a more sustainable level. Fed officials pay close attention to wages because strong growth could keep fueling inflation, eating into Americans’ real wage gains as many goods and services become more expensive and making it harder for the Fed to bring inflation back down to its 2 percent goal.

“We want strong wage increases,” Fed Chair Jerome Powell said at a press conference in December. “We just want them to be at a level that’s consistent with 2 percent inflation.”

Historically, nominal wage growth has typically outpaced inflation by about a percentage point. But both wage growth and inflation are now much higher than normal. Even though paychecks have been growing rapidly, inflation has outpaced wage gains for many workers and real wage growth has been negative for nearly two years.

In December, average hourly earnings increased by 4.6 percent from the year before and 0.3 percent from the prior month. In comparison, wages grew at an average rate of about 5.1 percent in 2022. Average hourly earnings are calculated by dividing the total worker payroll by the total worker hours, meaning that they can reflect changes in wages and workforce composition.

Although inflation has started to slow in recent months, price increases have been outpacing wage gains for much of the pandemic. In December, prices rose 6.5 percent from the year before and declined 0.1 percent from the prior month, according to a Consumer Price Index report released last week. The slowdown in inflation last month was mainly driven by lower fuel, used cars, and airline fare costs.

Wage gains have been more rapid for certain workers, however. Paychecks have climbed the most for lower-skilled workers, for instance, according to data from the Federal Reserve Bank of Atlanta’s wage growth tracker. In December, wages rose 6.8 percent for low-skill workers compared to 6 percent for high-skill workers. Hourly workers also saw wages increase by 6.5 percent compared to 5.9 percent for non-hourly workers.

Slower wage growth could reduce pressure on prices

A slowdown in pay gains could help ease inflation because businesses’ operating costs wouldn’t be as high, meaning that employers might not feel as much of a need to raise consumer prices or be more likely to offset costs in other ways, said Kathy Bostjancic, the chief economist at Nationwide. That’s especially true for businesses that offer services, since worker compensation is a major cost. Slower wage growth could also cool consumer demand since workers would not have as much income to spend.

Bostjancic said she expected to see wage growth gradually slow throughout the year as the demand for workers falls, although she noted there are some reasons to believe that wage gains could be persistent. The labor market is extremely tight, and even though hiring has started to decelerate, employers continue to add hundreds of thousands of jobs to the economy each month. The unemployment rate also stands at 3.5 percent, a half-century low. 

“You’re still seeing the lack of skilled labor remain an issue for companies,” Bostjancic said.

Fed officials generally see wage growth as a potential driver and signal of overall inflation, making those gains important to watch since they could influence how aggressively the Fed raises interest rates, said Aaron Sojourner, a labor economist and senior researcher at the W.E. Upjohn Institute for Employment Research.

The Fed started hiking interest rates early last year, which has made borrowing money and doing things like taking out a mortgage more expensive. The Fed is trying to curb consumer demand, which should eventually lead to slower price increases. But policymakers face a difficult task — by slowing the economy to rein in inflation, the Fed risks going too far and causing an unnecessarily painful surge in unemployment. Businesses could respond to higher interest rates and slower demand by reducing hiring or laying off workers.

The central bank has raised rates aggressively, only recently pulling back by lifting rates by half a percentage point in December after several straight three-quarter-point increases. Economic forecasters expect the Fed to raise rates by an even smaller quarter percentage point at the central bank’s next meeting at the end of the month.

“I think the Fed isn’t sure and is skeptical of the idea that wages can rise much faster than broad prices for a long time,” Sojourner said. “The Fed wants to see the growth rate of wages coming down.”

As the broader labor market cools, wage growth has slowed. Julia Pollak, the chief economist at ZipRecruiter, said wage growth was faster earlier in the pandemic for several reasons. Workers needed to be compensated more for the health risk of working in manual services or working in person, she said. Employers also needed to raise pay and expand benefits when there were fewer available workers because of school closures and limited access to public transportation.

And even though inflation has been outpacing average hourly earnings on an annual basis, some economists note that monthly data shows that price growth has been slower than or similar to wage growth recently. 

“That is likely to continue and that effect actually could get bigger because we are seeing inflation coming down pretty rapidly,” Pollak said.

Many economists are predicting that inflation will continue to slow in the coming months after potentially peaking at 9.1 percent in June. That’s in part because supply chains have started to heal, easing pressure on goods prices. Private data sources have also found that rent prices for new leases have already started to drop. Because changes in rent prices tend to show up in the government data with a lag, economists are expecting to see a greater slowdown in shelter cost increases in the coming months.

Vincent Reinhart, the chief economist and macro strategist at Dreyfus and Mellon, said that if inflation slowed to around 3 percent by the end of the year, he would expect average hourly earnings to return to a more sustainable rate of around 3.5 percent on an annual basis. But Reinhart, a former Fed economist, also noted that the unemployment rate was extremely low and there were nearly twice as many job openings as there were unemployed people.

“There should be a lot of pressure on wages,” Reinhart said. “They can’t take it as given that just because the last couple of months were favorable, underlying conditions are favorable.”

The United States hit the debt ceiling — the total amount of money the federal government can legally borrow — on Thursday as lawmakers continued to clash over negotiations to raise the limit. The Treasury Department is now deploying what it calls “extraordinary measures” to make sure the country can keep paying its bills. 

Although “extraordinary measures” might sound alarming, economists say the Treasury has a history of using them, and those changes shouldn’t immediately impact the lives of Americans. They essentially work as accounting tools that temporarily allow the government to continue funding its normal operations and help buy Congress more time to reach a deal.

In a letter to congressional leadership, Treasury Secretary Janet Yellen said the Treasury Department started to use some of its extraordinary measures after the current debt limit of $31.4 trillion was projected to be hit on Thursday, but she said the amount of time the measures would last was subject to “considerable uncertainty.”

Although this means the country will be able to avoid defaulting on its debt for now, if that does eventually happen for the first time, the consequences would be dire. That would not only be bad for Americans who depend on government benefits like Social Security checks, but it would also create chaos in the stock market and inflict pain across the broader economy.

Americans shouldn’t be immediately impacted by “extraordinary measures”

Extraordinary measures are basically accounting maneuvers. For example, the Treasury Department would pause investments in some government funds, then make them up once the debt limit is raised or suspended.

By suspending investments in certain funds, the Treasury temporarily reduces the amount of debt these funds hold, which would allow the government to stay under the borrowing cap and continue standard operations for a longer period, said Rachel Snyderman, a senior associate director of business and economic policy at the Bipartisan Policy Center.

In her letter, Yellen said a “debt issuance suspension period” would begin on Thursday and last through June 5. The Treasury will start redeeming existing and suspending new investments in the Civil Service Retirement and Disability Fund, which provides benefits to government workers, and suspend investments in the Postal Service Retiree Health Benefits Fund.

In a letter last week, Yellen said she also expected the Treasury to start suspending reinvestment of the Government Securities Investment Fund of the Federal Employees Retirement System Thrift Savings Plan this month.

Other potential options include suspending the daily reinvestment of securities held by the Exchange Stabilization Fund, which is used to buy or sell foreign currencies, or suspending the issuance of State and Local Government Series securities. Yellen has said it was unlikely that both the Treasury’s cash and measures would be exhausted before early June.

Synderman said the measures were a “temporary fix” that Americans should not immediately notice. For example, she said, the Treasury would not be “dipping into the hard-earned savings of federal employees” by carrying out the measures, and the Treasury would eventually restore the funds and any interest that would have otherwise been earned.

According to the Treasury, civil service benefit payments, postal retiree health benefit payments, and payments from the retirement fund for federal employees would continue to be made as long as the country had not exhausted its extraordinary measures. Once a deal on the debt limit was reached, the funds would be “made whole” and recipients would be unaffected.

Treasury secretaries have a history of deploying these measures in recent years, regardless of which political party holds control of the White House or either chamber of Congress, Snyderman said. The Treasury last deployed these measures in August 2021 before lawmakers eventually raised the debt limit. They were also used in March 2019, December 2017, and March 2017, according to a timeline compiled by the Bipartisan Policy Center. The measures were first used in September 1985 and formally authorized in October 1986.

But Snyderman said the Treasury cannot rely on these actions indefinitely since funds can be completely disinvested. When a fund is down to zero, the measure can no longer be used to extend borrowing capacity.

“Once extraordinary measures kick in, the average American is not going to see a change overnight,” Snyderman said. “Extraordinary measures signal that the clock is ticking and as time progresses, we are going to see changes in the economy.”

The government is limited in what it can do after

If the extraordinary measures are exhausted and the Treasury runs out of cash, economists say there isn’t much the federal government can do to pay all of its obligations on time until lawmakers reach a deal.

Michael Strain, the director of economic policy studies at the conservative American Enterprise Institute, said the United States was facing the “highest probability of some sort of a default in decades.”

If the country reached a point where it could not pay all of its bills, Strain said the Treasury could attempt to prioritize some obligations. For instance, Treasury officials could choose to first pay all bondholders who hold federal debt, then military salaries and Social Security benefits, but then decide they don’t have enough money to cover bills incurred by the National Park Service, Strain said. The Treasury has not had to prioritize certain payments over others before, however, and it is unclear if that would be successful or met with legal challenges.

“There are real questions about whether or not that would work,” Strain said.

Some have also raised the prospect of the treasury secretary minting a trillion-dollar coin, depositing it into the Treasury’s account at the Fed, and then using those funds to keep the government operating until the debt limit is raised, although economists say that’s unlikely. Congress has made clear that its will is to control the debt ceiling, and the Treasury likely wouldn’t try to clearly subvert that, said Wendy Edelberg, the director of the Hamilton Project and a senior fellow in economic studies at the Brookings Institution. 

The Federal Reserve could also attempt to stabilize financial markets and boost the economy by purchasing Treasury bonds if the country does default on its debts, Edelberg said. But the central bank could also be wary about worsening inflation, which is still uncomfortably high, she said. The Fed has been aggressively raising interest rates for months to bring rapid price increases under control.

“In a different environment, you might think that the Fed could flood the market with money in order to somehow offset the negative effects of this,” Edelberg said. “But it would have to be careful not to do it in a way that fuels inflation.”

Although a default could have disastrous impacts on the economy, Edelberg said she was not very confident that lawmakers would reach a resolution on the debt limit soon.

“It’s irresponsible,” Edelberg said. “It would be a completely self-inflicted wound.”

Update, January 19, 11:20 am: This story has been updated to include the US hitting the debt ceiling Thursday morning and the response from Treasury Secretary Janet Yellen.

Inflation has slowed for six straight months, which is good news for both consumers and economic policymakers.

In December, consumer prices rose 6.5 percent from a year earlier, down from 7.1 percent in November, according to a Consumer Price Index report released on Thursday. The index fell 0.1 percent from the month before after prices picked up by 0.1 percent in November.

The slowdown was mostly a result of declining energy costs as gasoline became less expensive. Used cars and airline fares also fell in price, while gains in food prices slowed. Housing costs, however, continued to climb.

Because it showed inflation slowing down, the report is positive news for Federal Reserve officials, who have been raising interest rates for months to rein in stubbornly high inflation. By lifting rates, the central bank is making borrowing costs more expensive in an attempt to curb consumer demand. That should translate to slower price increases over time as consumers spend less, business investment cools, and firms hire fewer workers.

The Fed is on track to raise rates again at their next meeting at the end of the month, though economic forecasters expect the size of that increase to be smaller than last year’s rate hikes.

Here are three charts that help explain where inflation stands right now.

Energy prices were down 4.5 percent in December, especially gas prices, which slid 9.4 percent on a monthly basis. That’s a bigger decrease than in November, when energy prices declined 1.6 percent and gas prices fell 2 percent.

Gas prices started soaring after demand for oil rebounded from pandemic lows and Russia’s invasion of Ukraine strained energy supplies. Fuel prices have since fallen as oil prices have dropped from last summer’s peaks and the global economy has slowed, dragging down demand for oil.

The average national gas price was $3.27 as of Thursday, according to data from the American Automobile Association. That is about the same as a month ago, when national prices averaged $3.26, but slightly lower than a year ago when average prices were $3.30.

In good news for shoppers at the grocery store, increases in food prices are starting to slow after several months of strong gains earlier last year. In December, food prices rose 0.3 percent from the month before, down from 0.5 percent in November. Overall, food prices climbed 10.4 percent from a year earlier.

Consumers paid more for meats, poultry, fish, and eggs, with the index for those items increasing by 1 percent from November to December. Overall fruit and vegetable prices, however, declined by 0.6 percent over the month. The index for dairy and related products also decreased by 0.3 percent.

Food prices have shot up during the pandemic for several reasons. Higher gas prices and labor shortages drove up costs for businesses, which have been passed onto consumers. The war in Ukraine also strained the global food supply, since it disrupted exports of wheat, sunflower oil, and other produce. A deadly avian flu outbreak has also affected millions of birds and hurt the supply of poultry and eggs from commercial farms.

Fed policymakers pay close attention to “core” inflation, which essentially excludes changes in food and energy prices because they can bounce around each month and might not reflect underlying price trends. In December, core prices rose 0.3 percent from the month before, a slight increase from 0.2 percent in November but still slower than the rapid gains seen earlier in the year. Core prices increased 5.7 percent from a year earlier, down from 6 percent in November.

A large component of core inflation is shelter prices, which rose 0.8 percent in December, up from 0.6 percent the month before. There is reason for optimism, though: Private-sector data suggests that rent prices are already starting to cool. Many private data sources only examine prices for new leases to capture timelier market conditions, while government data also takes into account existing rentals. Since rents typically change when leases expire, which tends to happen annually, changes in rent prices can show up with a lag in government data. That has led economists to expect shelter prices to ease in the coming months.

“The rate for new leases is coming down,” Fed chair Jerome Powell said at a press conference in December. “So, once we work our way through that backlog, that inflation will come down sometime next year.”

Fed officials also pay attention to other categories within core inflation. Fed policymakers have said they want to see inflation ease more for core services excluding housing, since that could better reflect how wage growth is impacting inflation.

Economists also want to see price growth for core goods continue to slow. Earlier in the pandemic, consumers shifted spending away from services and instead bought more goods like exercise bikes and work-from-home equipment. That spike in demand, coupled with supply chain disruptions, resulted in a surge in goods prices. Americans are now spending more on services again, which has helped cool price increases for goods.

The economy is confusing right now. Many economists are predicting the United States will slip into a recession in the next year. Inflation remains stubbornly high, and the Federal Reserve continues to aggressively raise interest rates. But the labor market has held up: Employers are struggling to fill open positions and the unemployment rate remains low.

A jobs report released on Friday showed that, despite the dim outlook, the labor market is still churning along and has remained a bright spot in the economy.

Employers added 223,000 jobs to the economy in December, according to the Bureau of Labor Statistics report. That’s a slowdown from the month before, when employers added 256,000 jobs, but slightly more than economists were expecting.

It typically takes months for the effects of the Fed’s rate hikes to fully show in economic data. By making borrowing money more expensive, the Fed is trying to slow demand and get consumers to spend less. That should help ease inflation over time, but that could also result in businesses ramping down hiring or laying off workers.

So far — despite the fears and predictions of an economic downturn — labor market data doesn’t suggest the United States is on the brink of a recession. Here’s a guide to a few key numbers economists are watching closely.

1) Job growth

Although job growth has been slowing and November’s gains were revised downward, employers have still been adding a robust number of jobs to the economy each month (in 2021, job gains were stronger since the economy had more to recover after unemployment surged earlier during the pandemic). It would start to become troubling if the economy began to see several months of sustained job losses, economists say.

Because job openings are still high and there aren’t enough workers to fill them, Fed officials have said they believe job growth has room to pull back without the country seeing a huge spike in unemployment. Employers could leave positions unfilled, for instance, rather than lay off workers. The Fed is purposely trying to weaken the labor market, in part to ease pressure on wage growth, which should help tamp down inflation. 

Mark Zandi, the chief economist at Moody’s Analytics, said the Fed would likely be “pretty happy with” monthly job gains decelerating to any number between 100,000 and zero. 

“At that rate of job growth, you’d see unemployment slowly moving higher, but not fast enough to precipitate a loss of faith in the economy and a pullback by consumers,” Zandi said.

Aaron Terrazas, the chief economist at Glassdoor, said several months of net job losses would be a troubling sign of pain ahead for workers. He noted, though, that the economy was still a “pretty long way” from a recession because of the strength of the labor market, and it was possible that the United States could avoid one.

“That is certainly something that you could get worried about,” Terrazas said.

2) The unemployment rate

Many economists cite the “Sahm rule,” which measures whether the unemployment rate has increased sharply, as a benchmark for whether the economy has tipped into recession. According to the rule, created by former Fed economist Claudia Sahm, a recession is triggered once the three-month average of the unemployment rate rises half a percentage point above its low over the past 12 months.

That hasn’t happened. The unemployment rate has remained low and fell to 3.5 percent in December, according to Friday’s report. That’s down from 3.6 percent the month before and a half-century low.

Still, a higher unemployment rate could be driven up by different factors, such as more workers coming off the sidelines and starting to search for jobs. Nick Bunker, the economic research director for North America at the Indeed Hiring Lab, said underlying data would help determine how and why the unemployment rate was increasing. For instance, it would be important to examine data on the number of workers who go from being unemployed to having a job within the next month, which can be used to calculate the rate at which unemployed workers are finding jobs, he said. 

“If that number keeps trending down and gets lower, that would be a sign that unemployed workers are having a hard time finding work, which is a negative sign for the labor market,” Bunker said.

3) Unemployment claims

Unemployment claims can be one of the first harbingers of a recession. Economists monitor the claims as a proxy for layoffs, since the data is released weekly and is more timely than other monthly government reports.

Unemployment claims have typically averaged around 250,000 a week in a more normal economy with a well-balanced labor market, Zandi at Moody’s Analytics said. If jobless claims rose closer to around 300,000 per week, that would be consistent with a recession, he said.

Unemployment claims fell to 204,000 in the week ending December 31, down 19,000 from the week before, according to Labor Department data. Jobless claims stayed low in 2022 compared to historical levels, underscoring the tightness of the labor market: The number of claims last year peaked at 261,000 in the week ending July 16. 

4) Layoffs, job openings, and the quits rate

Data on layoffs, job openings, and how many workers are quitting their jobs also help economists learn more about the strength of the labor market and are released in a monthly BLS report.

Layoffs remained low at 1.4 million in November (in comparison, layoffs were nearly 2 million in February 2020, before the pandemic spike). The number of people quitting their jobs also remains higher than normal. In November, 4.2 million people quit their jobs and the quits rate stood at 2.7 percent, according to the most recent report. Job openings remain high at 10.5 million in the same month. 

Bunker at Indeed said the quits rate was an important indicator to watch because it underscored how confident workers were in their ability to leave their current job and find a new one. Quitting in the private sector is still about 16 percent higher than the 2019 average, Bunker said.

“It’s hard to see an imminent recession if people are still voluntarily leaving their old jobs at high rates,” Bunker said.

Month-to-month data can bounce around, though, and Bunker said he would want to see changes over several months before he became more concerned about a recession.

“You’re going to need to see a long period of time of gradual deterioration or a big sharp reversal for any of the indicators in the labor market to trip the alarm bell,” Bunker said.

Keith Miller, a technician at an air compressor plant in Connersville, Indiana, was able to build his savings for the first time during the pandemic — he had about $16,000 stored away at one point last year. 

Miller, 48, said he was working extra hours since orders at the plant had increased early in the pandemic. Stimulus checks and extra child tax credit payments from the federal government also helped Miller cover necessary expenses for himself and his 8-year-old son, allowing him to save.

But the plant cut back his hours more than a year ago, and the federal government stopped sending out expanded child tax credit payments at the end of last year. At the same time, many necessities have become more expensive, including Miller’s monthly rent and milk at the grocery store. Miller said he went from having extra money in his account to being worried about making ends meet, and he’s now about $700 behind on paying his electricity bills.

“I honestly don’t have any savings. It’s gone,” Miller said. “If things keep getting worse, I don’t know what we’re going to do.”

Miller isn’t alone. Many Americans piled up their savings during the pandemic after lawmakers passed rounds of stimulus measures to prop up the economy, and as households spent less on travel and other in-person events. But with many stimulus programs over, excess savings are quickly dwindling as inflation has spiked and stretched people’s budgets. And even though a strong labor market has led to fast wage growth, inflation has outpaced those gains.

Beyond making life more difficult for people struggling to afford basic essentials like food and housing, the drop in savings is worrying because it comes at a precarious time. Economists are growing increasingly concerned about a potential recession next year as the Federal Reserve raises interest rates to bring inflation under control. Consumer spending is key to ensuring economic growth, making up about two-thirds of GDP. But with pandemic savings dwindling, many Americans might not be able to or choose not to spend as much as they have been during the recovery, which could further slow the economy.

Pandemic savings are draining away in many households

Estimates of excess savings vary, but according to data from Bank of America, Americans still have about $1.2 trillion in extra savings, which is down substantially from a peak of more than $2 trillion last year. The personal saving rate also dropped to 2.3 percent in October, down from this year’s peak of 4.7 percent in January and 7.3 percent a year before.

Consumers built up their savings throughout the first two years of the pandemic, ending 2021 with a “huge amount of savings,” said Diane Swonk, the chief economist at KPMG. Those extra savings helped keep consumers spending and led to a more resilient recovery, even as inflation has eaten into many people’s budgets.

Earlier in the pandemic, lawmakers passed several relief packages to stimulate the economy, which included direct checks for individuals, expansions to unemployment insurance, and hundreds of billions in aid to state and local governments. Congress also passed expansions to the child tax credit, which gave families up to $3,600 per child and helped lift millions of children out of poverty.

Chris Wheat, the president of the JPMorgan Chase Institute, said household checking account balances were significantly higher directly after families received federal stimulus payments, with balances among lower-income families up more than 100 percent around the middle of last year compared to 2019. 

Checking account balances have since come down, especially those belonging to lower-income and Black and Hispanic families. The most recent data through June showed that checking account balances among lower-income families were still higher than they were before the pandemic, but up about 50 to 60 percent from 2019 in comparison, Wheat said.

Consumers started to drain their excess savings this year as prices shot up substantially for things like groceries, gas, and rent, Swonk said. And although total excess savings haven’t entirely depleted, that extra cushion is gone for many families. The lowest quintile of households depleted their excess savings halfway through the year, Swonk said. An October research report from the Fed found that households in the top half of the distribution held a large majority of excess savings, which totaled about $1.35 trillion in the middle of this year. Lower-income households typically spend a larger share of their budgets on necessities like food and housing, meaning that inflation has cut into their savings more.

“What little we have left by the end of the year will be in the top-income households, which have less of a propensity to spend out of savings because they have income,” Swonk said. “The cushion on savings has dwindled quite dramatically for those who need it most.”

Some economists say excess savings may not help boost spending much next year as the Fed continues to raise interest rates, which will likely slow the economy further.

The Fed is intentionally trying to cool consumer demand by making borrowing money more expensive, which should eventually lead to slower price growth as people spend less. But by doing so, the Fed risks going too far — if businesses respond by hiring fewer workers or even laying them off, that could lead to a spike in unemployment. That could also result in lower incomes and fewer savings.

Excess savings might not provide much of a cushion next year

Michael Gapen, the head of US economics at Bank of America, said extra savings — along with higher wages from a strong labor market — have helped keep consumers spending and the economy expanding. But excess savings are falling by about $100 billion each month, and upper-income households now hold about 60 percent of those savings, according to Bank of America estimates.

That might not provide much of a cushion for the economy next year, since excess savings can quickly turn into “precautionary saving,” Gapen said, meaning that consumers who have extra savings could still pull back spending because they’re more nervous about their job security or the general state of the economy. That could also push the saving rate up. 

“That’s kind of when the game is up for the recovery,” Gapen said. He added that it was “more likely than not” that the country would tip into a recession next year as the Fed raises interest rates, although he said it was unclear how drastic or long a recession might be. 

There are still some reasons to believe that the current level of excess savings could continue to prop up the economy. The upper 20 percent of households typically account for about 80 percent of spending in leisure and hospitality, a sector that was severely constrained during the pandemic, Gapen said.

“You could argue the money’s exactly on the balance sheets of the households that are most likely to engage in that spending,” Gapen said. “It means the recovery could go on longer.” 

But there’s no guarantee that high earners will continue to spend that money, said Greg McBride, the chief financial analyst at Bankrate. Higher-income households that are sitting on more savings are still spending in a “very robust way,” but that could change as the economy continues to slow, McBride said.

“We’ve certainly seen a sharp decline in financial markets this year. If you started to see a meaningful retreat in home prices, that could certainly do it, or a substantive rise in unemployment,” McBride said. “Any of that could prompt even higher-income households to clutch the pocketbooks tighter and cut back on spending.”

Lower and middle-income households that have been burning through extra savings at a faster rate also won’t have much to fall back on as the economy weakens, which could further hurt spending, McBride said.

Whether a recession comes or not, there is a growing unease among many Americans, even as some have more money than they did pre-pandemic. McBride noted that a Bankrate poll released in June found that 58 percent of Americans were uncomfortable with the amount of emergency savings they had, up from 48 percent last year and 44 percent in 2020.

Some Americans have started cutting back spending now to stock up their savings ahead of a potential economic downturn.

Cassie Williams, 38, a licensing specialist at an advertising firm in Farmington, Michigan, said she makes nearly $20,000 more annually now compared to the job she had before the pandemic started. Because of her new job, it has become easier to set aside money — Williams said her family has more than $1,000 in their savings account.

But Williams said they’re no longer receiving expanded child tax credit payments, and everything seems to have become more expensive. Williams, who has a 6- and a 2-year-old child, said she is “making sure we’re not living above our means,” and their family has cut back spending on things like dining out in order to save more.

“Just because your job situation is stable today doesn’t mean that some external factor can’t come in and completely mess it up tomorrow,” Williams said. “We are prioritizing saving because we know that stuff happens.”

It’s not just the United States — the global economy is slowing down.

Inflation in European countries has spiked as the war in Ukraine has pushed up prices for essentials like heating, gas, and food. China’s “zero Covid” policies of strict lockdowns and mass testing continue to disrupt the production of goods. And around the world, central banks are raising interest rates in an attempt to bring rising prices under control by weakening consumer demand.

The International Monetary Fund has lowered its growth outlook for 2023, projecting that the world economy will grow 2.7 percent in 2023, down from 3.2 percent this year. The IMF said in a report last month that the global economy was facing “steep challenges” as pandemic-related supply-chain disruptions, the war in Ukraine, China’s economic slowdown, and rising interest rates weigh on growth. 

“In short, the worst is yet to come, and for many people 2023 will feel like a recession,” the organization said in the report.

In the United States, recession fears have grown and inflation remains stubbornly high. Some economists and investors have voiced concerns about the Federal Reserve’s aggressive interest rate hikes and how much they could weaken the world’s biggest economy. By making borrowing money more expensive, the central bank is trying to slow consumer demand, which should lead to slower price growth. But that could also trigger an economic downturn if businesses significantly slow hiring or lay off workers in response.

Still, some economists say the United States is actually in a better position than many other nations. European countries, for instance, are experiencing a dramatic slump because their energy supplies have been hurt more by the war in Ukraine. Many American households still have excess pandemic savings, and unemployment in the United States remains low.

“We’re raising interest rates fairly aggressively and financial market conditions have tightened in the US,” said Ryan Sweet, the chief US economist at Oxford Economics. “But so far, the economy’s weathered it reasonably well. Inflation is high in the US, but it’s high almost everywhere.”

Central banks around the world have lifted interest rates to combat surging prices. The European Central Bank started raising rates earlier this year, and officials recently signaled that they aren’t yet done. The Bank of England has also raised rates multiple times this year.

There are several factors contributing to economic instability globally, ranging from the war in Ukraine to China’s strict Covid policies and weakening property industry.

The war in Ukraine

The war in Ukraine has sparked an energy crisis in Europe, leading to a surge in prices. Countries that were more dependent on energy imports from Russia — such as Germany and Italy — have been hit especially hard by the restricted supply of natural gas.

Inflation in the Eurozone picked up 10.6 percent in October from a year earlier, up from 9.9 percent the month before. Inflation in the United Kingdom has also surged because of skyrocketing energy bills. In October, consumer prices in Britain climbed 11.1 percent from a year before.

The war has also disrupted exports of food such as wheat, sunflower oil, and other produce, straining the global food supply and pushing up inflation further.

These price increases could lead to a painful economic slowdown because things like food and gas tend to be necessary purchases for households. If European consumers are spending more of their budgets on those items, they have less money to spend on other goods and services, said Raghuram Rajan, a professor at the University of Chicago Booth School and a former chief economist at the IMF. 

“Energy and food are an essential part of your household budget,” Rajan said. “The more you spend on essentials, the less you have on discretionary items, so you have to cut back on that spending.” 

Pierre Lafourcade, a global economist at UBS, said European households also haven’t acculumated as much excess savings as Americans. Earlier in the pandemic, American lawmakers passed more stimulus measures and sent direct checks to consumers, leading to more robust savings that have helped cushion household budgets.

“You didn’t have the equivalent in the Eurozone,” Lafourcade said. “In the Eurozone and in the UK, they never had excess savings to begin with.”

UBS economists have predicted that the world economy will grow 2.1 percent next year, the lowest rate since 1993. Out of 32 economies, UBS expects 13 of them to contract for at least two quarters, which their economists say is akin to a global recession.

Although the war in Ukraine exacerbated global inflation, consumer prices were already on the rise around the world before Russia’s invasion. Workers testing positive for Covid led to factory shutdowns and increased demand for goods among American consumers pushed up prices for many goods. The IMF projected that global inflation will rise to 8.8 percent in 2022 from 4.7 percent in 2021, although the agency expects overall price increases to fall to 6.5 percent in 2023. 

The main factors driving up inflation in the United States, however, have differed from countries in Europe.

Karen Dynan, an economics professor at Harvard University and a nonresident senior fellow at the Peterson Institute for International Economics, said inflation in the United States has affected a broader array of goods and services compared to other countries, in part because of strong consumer demand. Earlier in the pandemic, people stuck at home ramped up spending on items like exercise bikes and work-from-home equipment. Supply chain disruptions also made it harder to produce and transport goods around the world, leading to a spike in prices.

Inflation in Europe has mainly been driven by rising energy and food costs as a result of the war in Ukraine, Dynan said. If energy and food costs subsided, that would significantly help ease rising prices in European countries, but that would have less of an impact on bringing down overall inflation in America, she said.

“In the United States, that’s not enough to take care of our inflation problem because our inflation is broader,” Dynan said.

China’s economic slowdown

China is under “extreme duress” because of its stringent Covid policies and weakening property industry, said Kenneth Rogoff, an economics professor at Harvard University and a former chief economist at the IMF.

China’s economy — the world’s second-largest — has taken a toll because of its attempts to eradicate Covid outbreaks through extensive lockdowns and mass testing efforts. Although economists expect China’s economy to rebound in growth next year as restrictions potentially ease, the “zero-Covid” approach has already disrupted the production of goods, weakened consumer spending, and led to growing protests against the policies.

The nation’s property sector, which makes up about one-fifth of economic activity in China, has also significantly weakened. For years, China’s housing industry saw rising sales and real estate prices. But excessive borrowing from developers has led to construction delays and falling home prices in the past year, sparking anger among Chinese homeowners. The Chinese government issued several directives earlier this month to boost its property industry, but economists say the sector is unlikely to see a quick rebound.

Although Rogoff said the United States economy is in “distinctly better shape right now” compared to European countries and China, he said a weaker global economy has many negative implications for American consumers. If consumers in other countries can’t afford to buy as many American goods, that can hurt American businesses and their exports. If businesses with large operations abroad are earning fewer profits in those countries, that could translate into lower salaries for their workers in America, Rogoff said.

And even though the US economy is holding up now, the country could still see a painful downturn in the coming months as the Fed continues to raise interest rates. 

“If we over-tighten, we’ll probably be doing worse than Asia,” Rogoff said. “Whether we’ll be doing worse than Europe, that’s a low bar.”