Don't stress about recession with inflation cooling and the job market booming, Nobel economist Paul Krugman says

• The US economy may escape recession as inflation is slowing and interest rates aren't hurting much.
• Paul Krugman said remote work, industrial policies, and pent-up travel demand may be fueling growth.
• The Nobel laureate sees little risk of recession given low US unemployment and strong job growth.

Surging US interest rates seem to have squashed inflation without tanking home prices or causing unemployment to spike, confounding experts who predicted a recession. Paul Krugman outlined why their grim predictions haven't come to pass in a New York Times column published on Tuesday.

"Something really strange has happened," the Nobel Prize-winning economist said. "I can't think of another example in which there was such a universal consensus that recession was imminent, yet the predicted recession failed to arrive."

Inflation hit a 40-year high last year, spurring the Federal Reserve to hike interest rates from nearly zero to north of 5% today, and pencil in further increases. Higher rates tend to cool price growth by discouraging spending, hiring, and investing. But they can also sap demand, pulling down asset prices and plunging the economy into a prolonged downturn.

While inflation has dropped from a peak of 9.1% last June to 4% in May, unemployment remained historically low at 3.6% in June, and job growth has continued at a fast clip. Against that backdrop, experts who predicted a recession are likely to be off the mark, Krugman said.

"The economy would have to fall off a steep cliff very soon to make them right, and there's little hint in the data of that happening," he emphasized.

The retired Princeton and MIT professor singled out a popular recession indicator that may be misleading commentators. The yield curve's inversion — which occurs when yields on short-term bonds exceed those on long-term bonds — reflects investors' expectations that the economy will slump and the Fed will cut rates, lowering bond yields in coming years, he said. In other words, the inverted yield curve is a mirror of the market's fear of a recession, not a predictor of one.

Krugman also highlighted three factors that might be staving off a recession. While the Fed's rate hikes have sent mortgage rates skyward, housing demand has been shored up by the rise of remote working over the past two years, he said. Also, soaring rents have spurred developers of multifamily housing to take out more expensive loans and erect more buildings, he noted.

Moreover, the Biden administration has effectively subsidized the US microchip and clean-energy sectors, which has fueled investment in manufacturing and other industrial activity, Krugman continued. Americans might also be traveling with a vengeance after being cooped up during the pandemic, he added.

"Whatever the reasons, the economy has shrugged off higher interest rates to an extent few expected," Krugman said.