Are We Heading Into a Recession?
Financial professionals are warning their clients to hunker down and brace for a recession, which now seems all but certain to many.
“Even for my wealthy clients I say you have to stick to a budget because we are heading for a storm of a recession of epic proportions and it’s going to be rough,” said personal finance expert and “Crawl Before You Ball” author Buffie Purselle.
Purselle is hardly alone in her analysis — but is she right?
There’s no doubt that a general sense of impending economic doom has blanketed much of the country, but that doesn’t necessarily indicate a recession on the horizon.
Recessions are a normal part of the business cycle. They begin at the economy’s peak of activity and expansion and end when a downturn hits its trough at the bottom.
They’re measured by specific economic indicators, like high unemployment — but the presence or absence of those indicators alone isn’t enough. The jobless rate can go up, for example, without the country going into a recession.
But unemployment remains low and wages have grown considerably over the last year. According to Vox, the labor market is strong and job openings are approaching record levels. Balance sheets for both corporations and households are in good shape, and while the stock market is down, most of the losses have been contained to the red-hot tech sector, which industry analysts had long said was overheated.
None of this points to a recession, but if the economy feels like it’s going south, you can probably blame the elephant in the room — inflation.
After a brief and barely noticeable one-month respite, inflation rose again in May, this time to 8.6% — the highest rate since 1981. Inflation reduces the average household’s standard of living by forcing families to spend more money for fewer goods and services.
Although prices are up economy-wide, gas has been the real budget-killer for most families.
The national average price per gallon has reached $5.01, according to AAA. With that, it’s marking a new all-time high.
Still, inflation — which makes you feel poorer — is not the same thing as a recession, which is when the economy moves in the wrong direction. It’s easy to confuse the two because they both harm average households. The difference is that inflation hurts because it negates wage growth. Recessions hurt because they stifle job creation.
Negative public sentiment can aggravate and hasten economic downturns. When people are pessimistic — as they are now thanks to inflation — they put off big purchases, which slows economic growth and causes businesses to lay off workers and postpone expansions.
In a typical year, the probability of a recession is about 15%, according to Goldman Sachs. In mid-May, Bloomberg surveyed 37 top economists who pegged the probability at 30% — double the percentage from just three months earlier.
Optimists are getting harder to come by, and many high-profile people and organizations are on record as stating that they believe a recession is imminent, including:
- Economists like Rober Shiller
- Banking industry titans like JPMorgan Chase CEO Jamie Dimon
- Analysts from investment Banks like Goldman Sachs
- The president of the World Bank
- Celebrity CEOs like Elon Musk, who warned that Tesla is cutting jobs to prepare for a downturn
- The head of the International Monetary Fund
- Investment giants like BlackRock
The Treasury Secretary Is Optimistic — But She Was Wrong on Inflation
In the first week of June, U.S. Treasury Secretary Janet Yellen was forced to concede that she had previously miscalculated in describing inflation as a “transitory” bridge between historical recovery and economic growth, according to Fortune. The publication reported that lawmakers and the public were increasingly blaming rising prices on the Treasury, which manages the money that the government pays out and receives, and the Fed, which controls the supply of money in the economy.
On June 9, the AFP news agency reported that Yellen said, “There’s nothing to suggest that there’s a recession in the works.”
She doesn’t expect gas prices to drop any time soon, but she cited strong consumer spending and investment spending to back her position that a recession is unlikely, according to Reuters.
On July 28 at 8:30 a.m., the Bureau of Economic Analysis will release an advance estimate of the second-quarter GDP results.
If it turns out that economic production declined, the report will answer the question of whether the country is in a recession for most. That’s because the national GDP dropped by 1.5% in the first quarter of 2022 — a disappointing result that was worse than most experts had predicted — and two consecutive quarters of negative growth is the most widely accepted definition of a recession, according to CNBC.
It’s not looking good.
The Atlanta Federal Reserve’s GDPNow tracker, a closely watched gauge, fell to 0.9% growth on June 7, down from 1.3% just one week earlier.
Regardless of the Treasury’s optimism or the warning signs from the Fed’s tracker, the National Bureau of Economic Research (NBER) has the final say as to whether America is in a recession.
The NBER has tempered expectations by stating that while two straight quarters of negative GDP growth can indicate a recession, it doesn’t always.
No matter what the NBER says, if the GDP lands below zero again this quarter, it will be much harder for Janet Yellen or anyone else to argue that America is not in a recession.
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