In the most recent Economist/YouGov poll, three out of five Americans believe that the US is in a recession. So why, then, is it unofficial?
The highest rate of inflation since the 1980s has many people feeling down. As a result, some Americans cut back on their driving to save money on gas, avoid buying pricier organic foods, and shop around for discounts.
More awful news has emerged. The once-booming home market is weakening, which lessens the certainty of the equity-locked-in property. Additionally, the S&P 500 has suffered. The index is down 19% for the year, wiping out trillions of dollars and making everyone nervous, from new investors to those who will soon retire.
However, because the official regulatory body in charge of declaring is mum on the subject, this might be a recession in the mood.
What exactly is a recession?
As a nation’s Gross Domestic Product (GDP), which measures the worth of the commodities and services it produces, rises, on average, its residents become a little bit wealthier.
However, this value can occasionally decrease, and a recession is typically described as when this occurs twice in a row, over a period of three months.
It typically indicates that the economy is struggling and may lead to more immediate layoffs by firms.
In the first quarter of 2022 and the next quarter, the US GDP declined by 1.6% and 0.6%, respectively. That is a recession in the majority of nations. Not in the US, though.
The Business Cycle Dating Committee, a little-known team of eight academics selected by the National Bureau of Economic Research, a nonprofit organization, issues the official recession declaration. Additionally, the committee has avoided using the R-word thus far.
How does the US economy fare when interest rates are higher?
The US Federal Reserve, the country’s central bank, is hiking interest rates to drive down prices. Making borrowing money more expensive is meant to encourage people to spend less and save more money.
Product and service prices will eventually decline due to the decline in consumer demand, but it will take some time. In addition, despite the recent drop in gas prices, living costs have continued to rise, placing a strain on America’s central bank.
In an effort to hasten the price decrease, the Fed is anticipated to increase its benchmark short-term interest rate by three-quarters of a percent at its most recent meeting. With such a significant increase, the benchmark rate, which is a factor in many consumer and corporate loans, would rise from 3% to 3.25%, the highest level in 14 years.
The worry is that if they go too far, it might stifle economic development and increase unemployment, which would feed present recession fears.
Arguments in favor of a soft landing
Despite the grave predictions, many people still hold out hope for a “soft landing,” or a mild economic downturn as opposed to a full-blown recession. A scenario like this might result in slower development without the turbulence brought on by a full-blown slump.
The robust job market in America is what’s fueling this optimism. In August, employers hired 315,000 new workers. But, according to Christopher Waller, governor of the US Federal Reserve, that is hardly a symptom of a faltering economy.
The Fed has stated that it will not hesitate to maintain high-interest rates for as long as necessary to reduce inflation. However, the process is unlikely to go well because the US central bank is getting ready to demonstrate that it won’t waver in its determination to cut prices. If rates are increased too much, the economy may experience a recession. On the other hand, if you increase them too little, inflation will keep rising.
President of the Federal Reserve Bank of Atlanta Raphael Bostic has stated that a soft landing is extremely difficult, acknowledging that it is a difficult high-wire performance to pull off.