Travelers wait in line at Hartsfield-Jackson Atlanta International Airport in Atlanta on June 30, 2023, forward of the 4th of July vacation weekend. Consumers are touring and consuming out extra although they’re paring down spending in different methods.

Elijah Nouvelage/AFP through Getty Images

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Elijah Nouvelage/AFP through Getty Images

Travelers wait in line at Hartsfield-Jackson Atlanta International Airport in Atlanta on June 30, 2023, forward of the 4th of July vacation weekend. Consumers are touring and consuming out extra although they’re paring down spending in different methods.

Elijah Nouvelage/AFP through Getty Images

As the nation celebrates its 247th birthday with sizzling canine and fireworks, the U.S. financial system is someplace in between scorching and fizzling.

The job market is robust, with unemployment close to a half-century low. But inflation — and the Federal Reserve’s efforts to combat it — are protecting recession fears alive.

Here are 5 issues to know in regards to the financial system throughout this Fourth of July vacation.

There’s excellent news and dangerous information about inflation

This time final summer time, the U.S. was dealing with the best inflation in 4 a long time. Gasoline costs had hit an all-time excessive, topping $5 per gallon within the wake of Russia’s invasion of Ukraine, and the price of a Fourth of July cookout was hovering.

Since then, inflation has moderated considerably, dropping to 4% in May from 9.1% final June. Gasoline costs have fallen to round $3.53 per gallon according to AAA. And grocery bills have dipped slightly within the final three months.

Stripping out unstable meals and power prices, nonetheless, so-called “core inflation” stays stubbornly excessive at 5.3% in May. That’s greater than two and a half occasions the Federal Reserve’s goal fee of two%.

So whereas the value of many items has leveled off and even fallen, the price of companies similar to restaurant meals and automobile restore continues to climb.

The Fed just isn’t performed with its combat towards inflation

The Fed’s concern over rising costs means policymakers are prone to push rates of interest not less than considerably increased, in an effort to tamp down demand and produce inflation underneath management.

The Fed has already raised its benchmark fee ten occasions since March of final yr, from close to zero to simply over 5%, marking probably the most aggressive actions to combat inflation for the reason that early Eighties.

Federal Reserve Chair Jerome Powell testifies earlier than the House Financial Services Committee throughout a listening to on Capitol Hill in Washington, D.C., on June 21, 2023. The Fed is prone to must proceed elevating rates of interest to convey down stubbornly excessive inflation.

Stefani Reynolds/AFP through Getty Images

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Federal Reserve Chair Jerome Powell testifies earlier than the House Financial Services Committee throughout a listening to on Capitol Hill in Washington, D.C., on June 21, 2023. The Fed is prone to must proceed elevating rates of interest to convey down stubbornly excessive inflation.

Stefani Reynolds/AFP through Getty Images

While Fed policymakers left rates of interest unchanged at their final assembly in June, they hinted that one or two more quarter-point rate hikes are possible by the tip of this yr.

That ought to proceed pushing up borrowing prices, making it costlier to purchase a home, finance a enterprise or carry a steadiness on a bank card.

The job market continues to be buzzing alongside … for now

Although economists had warned the Fed’s increased rates of interest may dampen the job market, it hasn’t turned out that approach up to now.

In reality, employers have added greater than 4 million jobs within the final yr, or a median of greater than 338,000 jobs a month. The unemployment fee has been beneath 4% for 16 months in a row — the longest such stretch for the reason that Sixties.

And the unemployment fee for African Americans hit an all-time low of 4.7% in April, earlier than climbing barely the next month.

Many industries similar to well being care and hospitality have continued to develop. And even these which are struggling are reluctant to put off employees for concern it is going to be laborious to rent them again when enterprise rebounds.

A waiter works at a restaurant in Alexandria, Va., on June 3, 2022. Consumers proceed to spend on companies like consuming out. That helps the financial system and the labor market, but it surely additionally retains inflation excessive.

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Olivier Douliery/AFP through Getty Images

A waiter works at a restaurant in Alexandria, Va., on June 3, 2022. Consumers proceed to spend on companies like consuming out. That helps the financial system and the labor market, but it surely additionally retains inflation excessive.

Olivier Douliery/AFP through Getty Images

There are some indicators, nonetheless, that demand for employees is cooling. The tempo of job development within the final six months is barely slower than within the earlier six. Job openings have additionally declined, though there are nonetheless much more open positions than unemployed employees to fill them.

Employers are having to pay extra to draw employees, though wage development has slowed up to now yr. Average non-public sector wages in May had been 4.3% increased than a yr in the past, barely outpacing inflation and boosting employees’ actual shopping for energy.

No, recession fears have not gone away

Despite fears the U.S. would skid right into a recession this yr, the financial system has continued to develop, although at a slower tempo than it was final fall.

The nation’s gross home product grew at an annual fee of two% within the first three months of the yr — down from 2.6% on the finish of final yr and three.4% within the third quarter of 2022.

That does not imply worries a couple of downturn have subsided, nonetheless. It’s nonetheless not clear if, or when, the financial system may sink right into a recession.

Rising rates of interest have been a specific drag on industries similar to housing and manufacturing, and the influence of the Fed’s aggressive actions will proceed to filter via to the broader financial system.

“Uncertainty right now is our biggest enemy,” says Tim Fiore who conducts a month-to-month survey of manufacturing unit managers for the Institute for Supply Management.

Consumers are nonetheless spending however not as freely

What’s serving to to maintain the financial system afloat is shopper spending, which accounts for greater than two-thirds of all financial exercise. But the buyer life-raft could also be shedding somewhat air.

Spending rose simply one-tenth of 1 % in May, a marked slowdown from the month earlier than.

Rebecca Veverka, for instance, has been pinching pennies in her leisure and journey finances to keep away from straining her checking account. The Parma, Ohio resident has canceled most of her TV streaming companies and now subscribes to simply separately. She’s additionally opted to not go to a pal in Washington state this summer time.

“I’m in a place right now where I can buckle down and manage, but if it gets much worse, I’m not sure what more I can do to handle it,” Veverka says. She lately drew down a few of her financial savings to repay expensive bank card debt.

Customers store throughout the grand opening of Nordstrom Rack at Best of the West buying heart in Las Vegas on May 18, 2023. Americans had constructed up their financial savings throughout the pandemic, which helped gasoline stronger shopper spending however there are indicators these financial savings are being whittled away.

David Becker/Getty Images for Nordstrom Rack

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Customers store throughout the grand opening of Nordstrom Rack at Best of the West buying heart in Las Vegas on May 18, 2023. Americans had constructed up their financial savings throughout the pandemic, which helped gasoline stronger shopper spending however there are indicators these financial savings are being whittled away.

David Becker/Getty Images for Nordstrom Rack

Americans piled up financial savings within the early months of the pandemic when a whole lot of spending was off limits and the federal government was sending out reduction funds.

Over the final yr, these financial savings helped many individuals keep their spending regardless of rising costs and rates of interest. But economists at Wells Fargo say these “excess” financial savings could quickly be whittled away.

“Whether the pandemic-related buffer runs dry by the end of this year or the start of next, households will still have the ability to spend at elevated rates,” Wells Fargo said in a research note Monday. “It will just come with a greater deterioration in household finances.”