There are two starkly different ways of looking at the U.S. economy right now: what the data says has happened in the past few months, and what history warns could happen next.

Most of the recent data suggests that the economy is strong. The job market is, incredibly, better today than it was in February 2020, before the coronavirus pandemic ripped a hole in the global economy. More people are working. They are paid more. The gaps between them — by race, gender, education or income — are smaller.

Even inflation, long the black cloud in the economy’s sunny sky, is showing signs of dissipating. Government data released Wednesday showed that consumer prices were up 5% in March from a year earlier, the slowest pace in nearly two years. Over the past three months, prices have risen at the equivalent of a 3.8% annual rate — faster than policymakers would like, but no longer the five-alarm fire it was at its peak last year.

Yet for all the good news, economists remain worried that a recession is on the way or that the Federal Reserve will cause one in trying to rein in inflation.

“The data has been reassuring,” said Karen Dynan, a Harvard economist and former Treasury official. “The things that we’re nervous about are all the things that we don’t have a lot of hard data about.”

Beginning with the banks: Most of the recent data predates the collapse of Silicon Valley Bank and the upheaval in the banking system that followed. Already, there are signs that small and midsize lenders have begun to tighten their credit standards in response to the crisis, which, in turn, could push the businesses that are their clients to cut back on hiring and investment. The extent of the economic effects won’t be clear for months, but many forecasters — including economists at the Fed — have said that the turmoil has made a recession more likely.

The Fed began raising interest rates more than a year ago, but the effect of those increases is just beginning to show up in many parts of the economy. Only in March did the construction industry begin to shed jobs, even though the housing market has been in a slump since the middle of last year. Manufacturers, too, were adding jobs until recently. And consumers are still in the early stages of grappling with what higher rates mean for their ability to buy cars, pay credit card balances and take on other forms of debt.

The economic data that paints such a rosy picture of the economy is “a look back into an old world that doesn’t exist anymore,” said Ian Shepherdson, chief economist of Pantheon Macroeconomics.

Shepherdson expects overall job growth to turn negative as soon as this summer, as the combined impact of the Fed’s policies and the bank-lending crunch hit the economy, leading to job cuts. Fed policymakers “have done more than enough” to tame inflation, he said, but appear likely to raise rates again anyway.

Other economists, however, argue that the Fed has little choice but to keep raising rates until inflation is definitively in retreat. The recent slowdown in consumer price growth is welcome, they argue, but it is partly a result of the declines in the price of energy and used cars, both of which appear poised to resume climbing. Measures of underlying inflation, which strip away such short-term swings, have fallen only gradually.

“Inflation is coming down, but I’m not sure that the momentum will continue if they don’t do more,” said Raghuram Rajan, an economist at the University of Chicago Booth School of Business and a former governor of India’s central bank.

The Fed’s goal is to do just enough to bring down inflation without causing such a severe pullback in borrowing and spending that it leads to widespread job cuts and a recession. Striking that balance perfectly, however, is difficult — especially because policymakers must make their decisions based on data that is preliminary and incomplete.

“It is going to be extremely hard for them to fine-tune the exact point,” Rajan said. “They would love to have more time to see what’s happening.”

A miss in either direction could have serious consequences.

The recovery of the U.S. job market over the past three years has been nothing short of remarkable. The unemployment rate, which neared 15% in April 2020, is down to the half-century low it achieved before the pandemic. Employers have added back all 22 million jobs lost during the early weeks of the pandemic, and 3 million more besides. The intense demand for labor has given workers a rare moment of leverage, in which they could demand better pay from their bosses, or go elsewhere to find it.

The strong rebound has especially helped groups that are frequently left behind in less dynamic economic environments. Employment has been rising among people with disabilities, workers with criminal records and those without high school diplomas. The unemployment rate among Black Americans hit a record low in March, and pay gains have in recent years been fastest among the lowest-paid workers.

All of that progress, critics say, could be lost if the Fed goes too far in its effort to fight inflation.

“For this tiny moment, we finally see what a labor market is supposed to do,” said William Spriggs, a Howard University professor and chief economist for the AFL-CIO. And the workers benefiting most from the labor market’s current strength, he said, will be the ones who suffer most from a recession.

“You should see from this moment what you are truly risking,” Spriggs said. With inflation already falling, he said, there is no reason for policymakers to take that risk.

“The labor market is finally hitting its stride,” he said. “And instead of celebrating and saying, ‘This is fantastic,’ we have the Fed hanging over everybody and casting shade on this unbelievable set of circumstances and saying, ‘Actually this is bad.’”

But other economists caution that there are also risks in the Fed’s doing too little. So far, businesses and consumers have treated inflation mostly as a serious but temporary challenge. If they instead begin to expect high rates of inflation to continue, it could become a self-fulfilling prophecy, as companies set prices and workers demand raises in anticipation of higher costs.

If that happens, the Fed may need to take much more aggressive action to bring inflation to heel, potentially causing a deeper, more painful recession. That, at least according to many economists, is what happened in the 1970s and 1980s, when the Fed, under Paul Volcker, brought inflation under control at the cost of what was, outside of the Great Depression and the pandemic, the highest unemployment rate on record.

The real debate isn’t between the relative evils of inflation or unemployment, argued Jason Furman, a Harvard economist and former top adviser to President Barack Obama. It is between some unemployment now and potentially much more unemployment later.

“You’re risking losing millions of jobs if you wait too long,” Furman said.

There have been some encouraging — though still tentative — signs in recent weeks that the Fed may be succeeding at the delicate task of slowing the economy just enough but not too much.

Data from the Labor Department this month showed that employers were posting fewer open positions and that workers were changing jobs less frequently, both signs that the job market was beginning to cool. At the same time, the pool of available workers has grown as more people have rejoined the labor force and immigration has rebounded.

The combination of increased supply and reduced demand should, in theory, allow the labor market to come back into balance without leading to widespread job cuts. So far, that appears to be happening: Wage growth, which the Fed fears is contributing to inflation, has slowed, but layoffs and unemployment remain low.

Jan Hatzius, chief economist for Goldman Sachs, said the recent job market data made him more optimistic about avoiding a recession. And while that outcome is far from certain, he said, it is worth keeping the current debate in perspective.

“Given the incredible downturn in the economy that we saw in 2020 — with obvious fears of a much, much, much worse outcome — if you actually manage to get back to a reasonable inflation rate and high employment levels in, say, a three- to four-year period, it would be a very good outcome,” Hatzius said.

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This article originally appeared in The New York Times.

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