With turmoil in the markets, high inflation and impending hikes in interest rates that will make borrowing money more expensive, many Americans are wondering if the economy is headed into a recession.
Goldman Sachs President Lloyd Blankfein He said last weekend It is “definitely a very, very big risk factor”, and consumers should be “prepared for it”. However, he hedged his comments by saying that the Fed “has very powerful tools” and that a recession is “not baked in the cake”.
Although it’s impossible to know for sure, the odds of a US recession next year are steadily rising, according to a recent report. Bloomberg Survey out of 37 economies. They have a proven probability of 30%, which is double the odds from three months ago.
To put this number in context, the risk of a recession is usually on the cusp 15% in a given year, Because of unexpected events and many variables.
Bottom line: “The probability of a recession this year is very low,” says Jos Foucher, chief economist at PNC Financial Services Group. However, “it only gets worse in 2023 and 2024.”
A recession is a significant decline in economic activity that spreads through the economy and lasts more than a few months, according to the National Bureau of Economic Research, which officially declares recessions.
A key indicator of the likelihood of a recession is real gross domestic product (GDP), which is the inflation-adjusted value of goods and services produced in the United States. For the first time since the beginning of the epidemic, it decreased by a rate annual rate of 1.4% in the first quarter of 2022. Since many economists agree that 2% is a Healthy annual growth rate In terms of GDP, a negative quarter starting the year indicates that the economy may be shrinking.
Another factor is rising inflation, which has recently shown signs of slowing. But it’s still well above the Fed’s 2% target benchmark, with a On an annual basis, the rate was 8.3% in AprilAccording to the latest CPI figures.
With inflation rising, higher prices outweigh wage growth, making things like gas and rent more expensive for consumers. For this reason, the Fed is imposing rate increases, as they did in March and May, with Five more are expected to follow this year. These increases discourage spending by making it more expensive to borrow money for businesses and consumers.
While many economists are still forecasting GDP growth in 2022, the rate at which inflation will fall is less clear.
However, there are positive economic indicators to consider as well. Job numbers continue to look good, as the US economy was in April Twelfth consecutive month of job gains 400,000 or more. Employment and consumer spending levels remain strong, for now, despite rising interest and inflation.
“Ultimately, inflation in terms of higher prices needs to work its way into actual spending behaviour,” says Victor Canalog, head of commercial real estate economics at Moody’s.
It indicates that consumer spending in the United States It rose 2.7% last quarter: “People are still spending more, but when will they start spending less?”
Despite these pluses, risks remain. Fucher says the Fed is doing well with its monetary policy, because doing too much or too little to control inflation could hurt the economy even more.
“The higher interest rates are designed to cool growth and hopefully not push the economy into a recession,” Foucher says. But he says that if the central bank raises interest rates too much, it could push the economy into recession.
“That’s why I’m more concerned about 2023 or 2024, because we’ve felt the cumulative effect of all those rate hikes that we’ll see over the next year and a half.”
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