Recession fears grow, but how high is the risk?
Inflation is at a 40-year high. Stock prices are sinking. The Federal Reserve is making borrowing much costlier. And the economy actually shrank in the first three months of this year.
Is the United States at risk of enduring another recession, just two years after emerging from the last one?
For now, even the more pessimistic economists don’t expect a downturn anytime soon. Despite the inflation squeeze, consumers — the primary driver of the economy — are still spending at a healthy pace. Businesses are investing in equipment and software, reflecting a positive outlook. And the job market is more robust than it’s been in years, with hiring strong, layoffs way down and many employers desperate for more workers.
Yet several worrisome developments in recent weeks suggest that the risk of recession may be rising. High inflation has proved far more stubborn than many economists had expected. Russia’s invasion of Ukraine has exacerbated global food and energy prices. Extreme lockdowns in China over COVID-19 are worsening supply shortages.
And when Federal Reserve Chair Jerome Powell spoke at a news conference last week, he reinforced the central bank’s determination to do whatever it might take to curb inflation, including raising interest rates so high as to weaken the economy. If that happens, the Fed could potentially trigger a recession, perhaps in the second half of next year, economists say.
By mid-2023, the Fed’s benchmark short-term rate, which affects many consumer and business loans, could reach levels not seen in 15 years. Analysts say the U.S. economy, which has thrived for years on the fuel of ultra-low borrowing costs, might not be able to withstand the impact of much higher rates.
“Recession risks are low now but elevated in 2023 as inflation could force the Fed to hike until it hurts,” Ethan Harris, global economist at Bank of America, said in a note to clients.
The nation’s unemployment rate is at a near-halfcentury low of 3.6%, and employers are posting a record-high number of open jobs.