For the United States economy, the early 2020s were a difficult time. The first of them was the COVID-19 pandemic, which caused a temporary but terrible economic downturn by disrupting supply systems throughout the world. Next, as spending resumed once the economy had reopened, inflation soared to heights not seen for decades.
In response, the Federal Reserve proposed a proposal to increase interest rates and rein in inflation. However, rather than calming investors’ nerves, this news further added to their worries. A result of this was concern that the Federal Reserve’s policies might cause a new economic downturn in the United States. The number of Google searches for the word “recession” nearly fivefold between March and May of 2022.
But experts disagree on whether or not the United States will have a recession in 2022. While they may agree on the current state of the American economy, they can’t agree on its potential future trajectory.
Is a Recession on the Way? Economic Slowdown Warning Signs
Timing a recession is difficult for anybody to do, not even specialists. Although they cannot predict the future, they may identify broad tendencies that suggest a decline may be on the horizon. When many indicators point to an impending economic downturn, that event becomes more likely.
- High Inflation
It is incorrect to assume that inflation always precedes a downturn. In reality, when economic growth is robust, inflation tends to spike. However, because of the government’s response to inflation, recessions frequently follow high inflation.
Interest rates are increased by the Federal Reserve and other central banks when inflation is high. Because of this, shoppers are likely to cut back on their spending, which will lead to lower overall costs. But it’s simple for the central bank to miss the mark and cause a recession by cutting expenditure too much.
Inflation in the United States was exceptionally high in 2021 and 2022. The inflation rate in March of 2022 was 8.5%, the highest level in almost 40 years. The Federal Reserve has responded by signaling a series of rate increases for 2022. Many professionals worry that this would trigger a recession in the United States.
CNBC polled 30 analysts in May 2022, and 57% predicted a recession due to the Fed’s rate rises. The recession, however, was not anticipated until 2023 at the earliest. The typical estimated commencement date was August 2023.
- Instability in the Global Economy
We are now participants in a worldwide economic system. What this implies is that issues in other regions of the world might have repercussions for the economy here at home. The cost of commodities in the United States can be impacted by disruptions in global supply networks caused by things like war, starvation, and natural catastrophes.
The economy faces a slew of similar challenges in 2022. Disruptions in the supply chain brought on by the COVID outbreak have added to the country’s already high inflation rates. As a result of the recent lockdowns in China, a major U.S. trading partner, these disruptions have intensified.
The Russian invasion of Ukraine has made a bad situation worse by lowering exports from both nations. Oil prices rose globally as a result of the sanctions the United States and other countries put on Russia, and this has translated into increased gas costs for Americans. Also, since Russia and Ukraine are both big grain exporters, food costs have surged.
Meanwhile, climate change is a constant danger that cannot be ignored. There will undoubtedly be intensified droughts, storms, and wildfires as a result. The likelihood of a catastrophic event that might affect manufacturing and transportation in the United States or overseas rises as a result.
This combination of variables makes it more challenging to rein back inflation. The possibility of the Fed imposing the type of large interest rate increases that might set off a recession rises as a result. Allianz Life conducted a study in April 2022 and found that the majority of respondents were worried that international tensions will cause a recession in the United States.
- A Yield Curve That Is Negative
The yield curve for Treasury bonds is a graph showing the relationship between the yields (interest rates) of various maturities of Treasury bonds. The greatest yields can be found on bonds with the longest maturities. Infrequently, though, the yield curve inverts, with shorter-term bonds paying greater interest rates.
When this occurs, it indicates widespread economic anxiety in the United States. For fear of losing money in the stock market, individuals are hastening to purchase low-risk products like long-term Treasury bonds.
One particular inversion of the yield curve predicts economic downturns with high precision. If the yield on 10-year Treasuries drops below that on 3-month Treasuries and stays there for three months, a recession is quite likely on the horizon.
The yield curve momentarily reversed in early 2022. As the Americans tell it. Treasury, the yield on 3-year bonds briefly exceeded the rate on 10-year bonds in March and April. For a brief period of time, the yield on 2-year bonds was higher than that on 10-year bonds.
These inversions did not, however, last for long or affect the all-important spread between 3-month and 10-year bonds. They aren’t a certain indicator of an impending recession, but they are cause for some cautious worry.
- Consumer Uncertainty
The U.S. economy relies heavily on consumer spending. Don’t waste your time creating something that has no potential audience. Therefore, consumer confidence in the economy’s future is essential.
If consumers have second thoughts about the economy, they are less likely to make purchases. They are making monetary preparations in anticipation of a bleak future.
However, if these concerns cause consumers to cut back on spending, which in turn causes a recession, the cycle might become self-fulfilling.
Inconsistent results from studies on consumer confidence in the year 2022. According to data collected by the University of Michigan’s Survey of Consumer Sentiment, consumer confidence cratered between December 2021 and May 2022. The Conference Board’s Consumer Confidence Index shows that the vast majority of people’s views on the economy have not changed.
Although Americans’ worries may be justified, they haven’t yet translated into lower spending. Despite the pandemic, McKinsey found in May 2022 that U.S. consumers boosted spending by 18% in March 2022 compared to March 2020.
In spite of this, there are signs that discretionary expenditure may be stabilizing. CNBC reports that Walmart’s revenues fell in May 2022, despite the fact that the retailer mostly caters to people with modest incomes. Overall consumer spending was down, and more people were choosing store brands.
- Business Uncertainty
The American economy is more than just consumer spending. The contributions of corporate spending are also noteworthy. When owners are anxious about the future, they are less inclined to expand their workforce or invest in new machinery.
And they’re worried about the year 2022. Based on data collected in April by CNBC, business optimism among small companies is at a record low. Most entrepreneurs gave the economy a mediocre or unsatisfactory rating.
Their primary worry was inflation, but they also fretted over potential interruptions in the supply chain, a lack of available workers, and the ongoing epidemic. Eighty-plus percent of them said there would be a recession in 2022.
The larger companies are worried as well, although not quite as much. The U.S. business confidence index from Moody’s shows a slight decline from October 2021 to April 2022. It’s still much over the long-term norm, though.
- Weak Stock Market
In May of 2022, the U.S. stock market had a brief bear market. When stock values fall by 20% from their most recent peak, we say the market is in a bear trend. This indicates investor skepticism about the economy’s future.
A decline in the stock market is not always indicative of an economic downturn. Stock values fluctuate often, and frequently for reasons that have nothing to do with the larger economy.
However, in this scenario, investor uncertainty is most likely to blame for the decline in stock prices. This trend indicates concerns about inflation, the state of the world, and the likelihood of a recession.
- Real GDP is falling.
The official definition of a recession is “a major fall in economic activity distributed across the economy, lasting more than a few months,” as stated by the National Bureau of Economic Research. GDP is the primary indicator of economic activity. A nation’s GDP measures the worth of all its final products. Therefore, a reduction in GDP is always indicative of a recession.
In 2022, the U.S. economy did see a decline, although a little one. The first quarter GDP growth rate was 1.4% on an annualized basis. It’s too early to tell if this is the start of a recession or just a blip on the economic radar. The second quarter of 2022 might see a recovery in GDP or it could see a continuation of the slide.
At this point in May 2022, the consensus among economists is that 2022 will see modest, positive increase in the gross domestic product. Both the Federal Reserve’s GDPNow projection and Goldman Sachs’ estimate growth of 2.4% for 2019. If their predictions come true, the U.S. economy will just endure a lull rather than a full-blown recession.
The economy’s poor start to the year may actually turn out to be a good thing. Lower consumer spending can help bring inflation under control, mitigating the need for increased interest rates.
- Labor Market Scarcity
In general, a high demand for employees in the labor market (a tight labor market) is indicative of a healthy economy. Many companies stop employing new employees while the economy is in a downturn. As people struggle to find work in a more competitive market, unemployment rates rise and earnings fall.
The inverse is true as of early 2022. The unemployment rate was 3.6% in May 2022, according to the Bureau of Labor Statistics, which is an all-time low. Wages and salaries finished the month of March roughly 5% higher than the same time a year prior.
There are, however, concerns among some economists that the job market is excessively tight. They make the case that increased inflation is a result of above-average pay. That raises the possibility that the Federal Reserve will have to take drastic steps to bring it down, which might set off a recession.
Creating a Soft Landing to Avoid Recession
Avoiding a recession in the United States economy is a top priority for the Federal Reserve in 2022 as it works to get inflation under control. A “soft landing” describes this type of landing.
The Federal Reserve will have to gradually increase interest rates, backing off when the economy shows signs of slowing. It’s like slamming on the brakes when driving too fast. You need to slow down, but not so quickly that you go flying forward and smash your face on the windshield.
Reaching a gentle landing is difficult, but not impossible. According to Princeton economist Alan Blinder, the Fed has done this at least three times before (1965, 1984, and 1994). Higher interest rates have caused recessions eight times before, but only five of those times were even moderate.
How likely it is that the Fed will execute a gentle landing in 2022 is a matter of debate amongst economists. According to a research published by Deutsche Bank in April, severe interest rate increases will be required to bring inflation down from its current high level. The financial institution believes a severe recession will follow beginning in 2023.
There are, however, some financial institutions that are more hopeful. UBS maintains that supply-chain problems are mostly to blame for inflation, and that they should improve after the epidemic passes. That means less drastic increases in interest rates down the road.
Moreover, Goldman Sachs economists only see a 15% likelihood of a recession in the coming year and a 35% chance in the coming two years.
The Fed continues to show a willingness to raise interest rates. When asked about the possibility of a recession in an interview with Marketplace in May, Fed head Jerome Powell replied that lowering inflation is his top objective.
Bottom Line
Overall, there is a decent possibility that the United States could have a recession in 2022 or 2023. On the other hand, such a conclusion is far from guaranteed. The Federal Reserve may yet achieve a gentle landing or, at worst, a moderate recession.
Although, it does not harm to plan ahead for a recession. When you take preventative measures like storing money for a rainy day, reducing your debt, and raising your credit score, you strengthen your financial position to better withstand a recession. Additionally, they will be of use to you if the economy continues to thrive.
