Rising inflation, surging interest rates, fragile economic activity, and unpredictable markets have increased the likelihood that the United States may enter a recession, according to analysts.
A recession is commonly characterised as two consecutive quarters in which the economy declines rather than grows, although there are several caveats. For example, the COVID-19 pandemic recession lasted barely two months, making it the shortest cycle on record.
The employment-based Sahm rule, named after former Fed economist Claudia Sahm, is one way to predict a recession. It was developed to detect the start of a recession earlier than official arbiters. According to the rule, the economy enters a recession when the three-month rolling average of the unemployment rate climbs by half a percentage point from its low.
As the Federal Reserve intensifies its fight against the highest inflation in four decades, whispers of an impending economic downturn have risen to nearly a roar.
Price increases and aggressive Fed interest rate rises pushed the benchmark S&P 500 stock index plunging to its lowest first-half performance since 1970.
Consumer confidence has reached new lows and analysts are increasingly concerned that a slump will not only occur but will occur soon – a risk highlighted by one widely followed Fe Across the nation, the primary topic of economic debate throughout the country – rising inflation – is quickly changing into the widespread conviction of a coming recession. Allies of the White House are preparing for it. Republican lawmakers are asserting that a downturn is unavoidable.
A White House official told politico that “the economy faces a range of global risks but said that economic strengths in the U.S. — a strong labour market, consumer spending and business investment — position us well – better than almost any other country – to build on our strong economic foundation and transition to steady, stable growth, with lower inflation.”
“And we can do so without giving up all the economic gains we’ve made,” the official added.
The government acknowledged last week that the economy contracted in the initial three months of the year, and the Atlanta Fed’s economic growth tracker predicts a second-quarter drop.
If this occurs, it will spark a heated discussion about whether the United States is currently in a slump.
The US GDP fell by 1.5% in the first quarter of 2022 (January-March). The majority of analysts projected a large gain in the second quarter (April- June).
Nonetheless, many of the contributing factors to GDP contraction in recent months are technical in nature — companies have stocked up on a lot of goods for their back rooms and aren’t going to add as much to that inventory — prompting many economists to question whether it’s truly a recession without the economic pain of significant job losses.
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According to a White House official, the fact that the United States has added an average of 400,000 jobs over the last three months shows that the economy is not in recession. The June jobs report, which is set to be released on Friday, July 8, will give more insight into the state of the labour market.
Himes, the Democratic congressman, reckons the Fed waited too long to begin hiking interest rates, a viewpoint shared by many Republicans, but he also believes the American economy can weather the storm.
“There’s no question that growth will moderate as a result of the Fed’s interest rate increases,” he said. “But with unemployment at 3.6%, you’re a long way from the ugly effects of a recession.”
Senator Elizabeth Warren (D-Mass.) asserts that the Fed is raising interest rates aggressively to combat inflation driven mostly by events that the Fed cannot control, such as supply chain disruptions and Russia’s conflict with Ukraine. She believes it will harm the economy while having no impact on pricing.
“Inflation is like an illness, and medicine needs to be tailored to the specific problem, otherwise you could make things a lot worse,” she told Powell during a hearing. “And right now, the Fed has no control over the main driver of rising prices.”
EPI’s Bivens anticipates inflation will naturally decline for a number of reasons, including increased food and energy costs reducing people’s capacity to buy other items, declining government expenditure, and slowing wage growth. He believes the Fed should not feel the need to cause a recession in order to bring prices down.
“They seem to be locking themselves into an ever-more hawkish stance, just as they’re getting close to going too far,” Bivens said.
The Atlanta Fed’s GDPNow gauge, which monitors economic data in real-time and adjusts continually, predicts a 2.1% drop in second-quarter output. That would meet the formal criteria for the recession when coupled with the 1.6% fall in the first quarter.
The tracker fell sharply from its previous forecast of a 0.3% increase on June 27. The drop was driven by data this week showing additional weakening in consumer spending and inflation-adjusted domestic investment, which placed the April-June period in negative territory.
It is uncertain if this will lead to a recession. The National Bureau of Economic Research, the official arbiter of recessions and expansions, observes that two consecutive quarters of negative growth are not necessary to define a recession. Meanwhile, according to ET, since World War II, the United States has never shrunk in consecutive quarters while not being in recession.