By PAUL WISEMAN
AP Economics Writer
WASHINGTON (AP) — The U.S. economy is caught in an awkward, painful place. A confusing one, too.
Growth appears to be sputtering, home sales are tumbling and economists warn of a potential recession ahead. But consumers are still spending, businesses keep posting profits and the economy keeps adding hundreds of thousands of jobs each month.
In the midst of it all, prices have accelerated to four-decade highs, and the Federal Reserve is desperately trying to douse the inflationary flames with higher interest rates. That’s making borrowing more expensive for households and businesses.
The Fed hopes to pull off the triple axel of central banking: Slow the economy just enough to curb inflation without causing a recession. Many economists doubt the Fed can manage that feat, a so-called soft landing.
Surging inflation is most often a side effect of a red-hot economy, not the current tepid pace of growth. Today’s economic moment conjures dark memories of the 1970s, when scorching inflation co-existed, in a kind of toxic brew, with slow growth. It hatched an ugly new term: stagflation.
The United States isn’t there yet. Though growth appears to be faltering, the job market still looks quite strong. And consumers, whose spending accounts for nearly 70% of economic output, are still spending, though at a slower pace.
So the Fed and economic forecasters are stuck in uncharted territory. They have no experience analyzing the economic damage from a global pandemic. The results so far have been humbling. They failed to anticipate the economy’s blazing recovery from the 2020 recession — or the raging inflation it unleashed.
Even after inflation accelerated in spring of last year, Fed Chair Jerome Powell and many other forecasters downplayed the price surge as merely a “transitory” consequence of supply bottlenecks that would fade soon.
Now the central bank is playing catch-up. It’s raised its benchmark short-term interest rate three times since March. Last month, the Fed increased its rate by three-quarters of a percentage point, its biggest hike since 1994. The Fed’s policymaking committee is expected to announce another three-quarter-point hike Wednesday.
No sector of the U.S. economy is more sensitive to interest rate increases than housing. And the Fed’s hikes and the prospect of steadily tighter credit are taking a toll.
Mortgage rates have risen along with the Fed’s benchmark rate. The average rate on a 30-year fixed-rate mortgage hit 5.54% last week, nearly double its level a year earlier.
The government reported Tuesday that sales of new single-family homes fell 8% last month from May and 17% from June 2021. And sales of previously occupied homes dropped in June for a fifth straight month. They’re down more than 14% from June 2021.
In response to the rapidly slowing home market, builders are cutting back. Construction of single-family homes dropped last month to its lowest level since March 2020, at the height of pandemic lockdowns.
AP Economics Writer Christopher Rugaber also contributed to this report.