According to the latest Economist/YouGov poll, three in five Americans say the US is in a recession. How come it’s not official?
Soaring inflation – the highest rate since the 1980s – has soured many. Some Americans drive less to save on gas, ditch expensive organic products, and seek deals to save a few bucks.
There’s more bad news. The once booming real estate market is slowing, making the equity tied up in real estate less secure. The S&P 500 has also taken a hit. The index has fallen 19% for the year, wiping out trillions in wealth and suddenly making everyone from young investors to soon-to-be retirees sweat.
But this could just be a recession in sentiment as the official governing body in charge of the statement is silent on the issue.
In a growing economy, a country’s citizens become slightly richer, on average, as the value of the goods and services it produces – its gross domestic product (GDP) – increases.
But sometimes their value falls, and a recession is usually defined as happening for two consecutive three-month periods — or quarters.
Typically, this is a sign that the economy is doing badly and may mean companies have more layoffs in the near term.
US GDP has fallen for two straight quarters — 1.6% in the first quarter of 2022 and 0.6% in the next. In most other countries, this is a recession. Just not in the US.
The official call for recession comes from the Business Cycle Dating Committee — a little-known group of eight economists selected by the National Bureau of Economic Research, a nonprofit organization. And so far the committee has refused to use the R-word.
America’s central bank, the US Federal Reserve, is raising interest rates to lower prices. The idea is that if it makes it more expensive to borrow, people will spend less and save more.
This drop in consumer demand will bring down the prices of goods and services that have been skyrocketing — but it took a while. Although gas prices have fallen recently, the cost of groceries and rent have continued to rise, leaving the Federal Reserve in a difficult position.
The Fed is expected to hike its short-term interest rate by three-quarters point for a third straight session at its latest meeting in hopes of accelerating the rate slide. Such a large hike would push interest rates – which affect much consumer and business credit – to a range of 3% to 3.25%, the highest level in 14 years.
The danger is that if they go too far, they could stifle economic growth and cause unemployment to rise – a risk that is fueling current recession fears.
Recession or not, the question is what’s next? Some see a downturn as inevitable.
“There’s never been a moment when we’ve had inflation above 4% and unemployment below 4%, and we haven’t had a recession in two years,” former US Treasury Secretary Larry Summers said recently.
Economist Nouriel Roubini – who predicted the 2008 crash – agrees.
He anticipates a “long and ugly” recession that could last into 2023 and a 40% drop in tank inventories.
Despite the dire warnings, there are many who believe a “soft landing” — a moderate economic slowdown rather than a full-blown recession — is still possible. In such a scenario, you may see slower growth without the upheaval associated with a full-blown downturn.
The reason for this optimism is America’s strong labor market. Employers hired 315,000 new workers in August. According to Federal Reserve Governor Christopher Waller, this is hardly a sign of a faltering economy.
In a recent speech in Vienna, he dismissed fears of a recession, saying: “The robust US job market gives us the flexibility to be aggressive in our fight against inflation.”
The Fed has said it will not hesitate to keep interest rates high as long as it takes to bring inflation down. As the US Federal Reserve prepares to show it will not flinch in its determination to cut prices, the process is unlikely to go smoothly. If it hikes rates too much, the economy could plunge into recession. Increase it too little and inflation will keep rising.
Federal Reserve Bank of Atlanta President Raphael Bostic acknowledged it was a difficult balancing act, recently saying that a soft landing is “a very difficult thing.”
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