Recessions, like unhappy families, are each painful in their own way. And the next one — which economists see as increasingly possible by the end of next year – will probably bear that out. A US downturn may well be modest, but it might also be long. India will not be an exception to the world recessions.
Many observers expect any decline to be a lot less wrenching than the 2007-09 Great Financial Crisis and the back-to-back downturns seen in the 1980s, when inflation was last this high. The economy is simply not as far out of whack as it was in those earlier periods.
While the recession may be moderate, it could end up lasting longer than the abbreviated, eight-month contractions of 1990-91 and 2001. That’s because elevated inflation may hold the Federal Reserve back from rushing to reverse the downturn.
The good news is there’s a limit to how severe it’s going to be. The bad news is it’s going to be prolonged. A roughly 2% contraction likely to begin in the fourth quarter and lasts through next year.
No matter what shape the pullback takes, one thing seems certain. There will be a lot of hurt when it comes. In the dozen recessions since World War II, on average the economy contracted by 2.5%, unemployment rose about 3.8 percentage points and corporate profits fell some 15%. The average length was 10 months.
Even a downturn on the shallower end of the spectrum would likely see hundreds of thousands of Americans at least lose their jobs. The battered stock market may suffer a further fall as earnings drop. And President Joe Biden’s already poor poll ratings could take another hit.
This would be the sixth or seventh recession in US. Every one of them is somewhat different, and every one of them feels equally painful.
Signs of economic weakness are multiplying, with personal spending falling in May for the first time this year, after accounting for inflation, and a US manufacturing gauge hitting a two-year low in June. There is likely cutting mid-year growth forecasts that will be perilously close to a recession.
The depth and length of the recession will largely be determined by how persistent inflation proves to be, and by how much pain the Fed is willing to inflict on the economy to bring it down to levels it deems acceptable.
The world is worried about a stop-go scenario akin to the 1970s, where the Fed prematurely eases policy in response to economic weakness before it has eradicated inflation from the system.
Such a strategy would set the stage for a deeper economic decline down the road, and even greater inequality. It was out front in warning last year the Fed was making a big blunder by playing down the inflationary threat.
The Fed is not going to pause until they see that inflation has convincingly come down. That means that this Fed will be hiking well into economic weakness, likely prolonging the duration of the recession.
A faltering economy is all but inevitable. The question has moved beyond if we are going to see a recession to what’s the depth and duration of a downturn.
Just as happened some 40 years ago, the decline in gross domestic product will be driven by a central bank determined to rein in runaway consumer prices. The Fed’s favorite inflation gauge is more than triple its 2% objective.
But there are good reasons to expect the outcome won’t be nearly as bad as the early 1980s, or the 2007-09 financial crisis – episodes when unemployment soared to double-digit levels.
The economy or in Americans’ psyche as it was when Paul Volcker took the helm of the Fed in 1979 after a decade of persistently powerful price pressures. So it won’t take nearly as big of a slump for today’s Fed to bring price rises down to more acceptable levels.
The Fed’s task today requires about half the amount of disinflation that Volcker had to put the economy through. What’s more, consumers, banks and the housing market are all better placed to weather economic turbulence than they were ahead of the 2007-09 recession.
Private-sector balance sheets are in good shape. . The US haven’t seen leverage taken out to the extent while the US sees vcxahead of the financial crisis.
Thanks in part to hefty government handouts that boosted savings, household debt obligations amounted to just 9.5% of disposable personal income in the first quarter, according to Fed data. That’s well below the 13.2% seen in late 2007.
Banks, for their part, recently aced the Fed’s latest stress test, proving they have the wherewithal to withstand a nasty combination of surging unemployment, collapsing real-estate prices and a plunge in stocks.
And while housing has been battered of late by the Fed-engineered surge in mortgage rates, it too is in a better place than 2006-07, when it was awash with supply due to a speculative building boom.
Today the US is about 2 million housing units that is short of what the United States demographic profile would suggest at this point. That puts a floor to some degree under how big a recession could be.
Duncan’s base case is for a sharp depreciation in home-price increases, but not an outright decline.
In the labor market, an underlying shortage of workers — thanks to baby boomers retiring and immigration lagging — is likely to make companies more cautious about shedding staff in a downturn, especially if it’s a mild one.
The story of the past two years has been businesses struggling to find workers. while USA don’t think they are going to see mass layoffs.
Some economists say the next recession will prove long-lived, however, if the Fed holds back from riding to the economy’s rescue — as it’s signaled it might if inflation stays stubbornly high.
A central banking conference last week that failing to restore price stability would be a bigger mistake than pushing the US into a recession.
Fiscal policy will also be hamstrung — and could well turn contractionary — if Republicans win back power in Congress, as looks likely in November midterm elections. In an echo of what happened after the financial crisis, GOP lawmakers might use debt-limit standoffs to push for cuts in government spending.
While not predicting a downturn, the economists agree that a recession may be lengthy if one occurred. That would particularly be true if the Fed is again hampered from providing the economy with help by not being able to cut interest rates below zero. The USA does not think it will be a severe one but it could be a long one.