What could the next recession in the US look like

Recessions, like unhappy families, are painful in their own way. The next post, which economists increasingly consider possible by the end of 2023, is likely to confirm this. a recession in the United States It may be modest, but it can also be lengthy.

Many observers expect any downturn to be much less daunting than the Great Financial Crisis of 2007-2009 and the back-to-back recession of the 1980s, when inflation was at its last. The economy has not gone out of control as it was in those previous periodsthey say

While the recession may be mild, it could end up being longer than the short eight-month contractions of 1990-91 and 2001. High inflation may prevent Federal Reserve Rush to reverse slack.

“The good news is that there is a limit to how bad the situation can get,” said Robert Dent, chief US economist at Nomura Securities. “The bad news is that it will continue.” Former Analyst The New York Fed expects a contraction of about 2 percent starting in the fourth quarter and continuing into next year.

No matter what form the backlash takes, one thing seems for sure: There will be a lot of pain when you hit. During the twelve recessions since World War II, the economy has shrunk an average of 2.5 percent, unemployment has risen by about 3.8 percentage points, and corporate profits have fallen 15 percent. The average duration was 10 months.

Even stasis is at the shallow end of the spectrum This will likely cause hundreds of thousands of Americans, at the very least, to lose their jobs. The battered stock market may go down further as profits fall. And President Joe Biden’s already low poll ratings could be dealt another blow.

“This will be the sixth or seventh recession, I think, since I started doing this,” said Scott Sperling, a veteran private equity expert. “Each of them is a different thing, and each of them feels the same pain.”

Signs of economic weakness multiply, with personal spending falling in May for the first time this year, after adjusting for inflation, and a gauge of US manufacturing hitting a two-year low in June. Michael Feroli, chief US economist at JPMorgan Chase & Co., responded to the latest data by lowering its mid-year growth forecast. Dangerously close to stagnation“.

The depth and duration of the recession will be determined in large part by continued inflation and how much pain the Fed is willing to inflict on the economy to bring it down to levels it deems acceptable.

Allianz SE chief economic adviser Mohamed El-Erian said he was concerned about a choppy scenario similar to what happened in the 1970s, where The Fed is easing policy prematurely in response to economic weakness before it takes inflation out of the system.

Such a strategy would lay the foundation for Deeper economic downturn in the future and greater disparitiesA columnist said the Bloomberg Opinion. El-Erian was at the forefront of warning last year that the Fed was making a big mistake in downplaying the inflationary threat.

What Bloomberg Economics says

The Fed will not stop until it sees inflation convincingly reduced. This means that this Fed will enter a state of economic weakness, and possibly prolong the recession.”

On the other hand, Federal Reserve Chairman Jerome Powell has argued that while there is a risk of a recession, The economy is still in a good position to handle Fed rate hike and avoid stagnation.

A growing number of private economists are not convinced.

“A faltering economy is almost inevitable. The question of whether we will see a recession has gone beyond what the depth and duration of the recession is,” said Lindsey Begza, chief economist at Stifel Nicolaus & Co.

Like it happened about 40 years ago, The decline in GDP will be driven by a central bank determined to rein in runaway consumer prices. The Fed’s preferred inflation measure is more than three times its 2 percent target.

But there are good reasons to hope that the outcome will not be as bad as it was in the early 1980s, or the 2007-2009 financial crisis, episodes in which unemployment soared to double-digit levels.

As Goldman Sachs Group Chief Economist Jan Hatzius has pointed out, inflation is not as ingrained in the economy or in the psyche of Americans as it was when Paul Volcker took over the Federal Reserve in 1979 after a decade of persistent strong price pressures. And therefore, It wouldn’t take such a big Fed drop today to reduce rate increases to more acceptable levels.

Leading academic economist Robert Gordon believes that the Fed’s job today requires about half the amount of inflation that Volcker had to do to the economy.

In addition, consumers, banks and The housing market is in a better position to face the economic turmoil than it was before the 2007-2009 recession.

Private sector balance sheets are in good shape, said Matthew Luzzetti, chief US economist at Deutsche Bank Securities. “We haven’t seen as much leverage as we did” before the financial crisis.

Thanks in part to large government donations that boosted savings and debt obligations Households accounted for only 9.5 percent of disposable personal income in the first quarter, according to data from the Federal Reserve. This is significantly lower than the 13.2 percent recorded at the end of 2007.

Banks, for their part, recently passed the Federal Reserve’s latest stress test, showing that they have the ability to withstand a bad mix of rising unemployment, The collapse of housing prices and the decline in inventories.

real estate market

While housing has been hit lately, it has been on the rise The Mortgage rates designed by the Federal ReserveHe is also in a better place than he was in 2006-2007when the show was overwhelmed by the speculative construction boom.

today, The United States has about 2 million housing units “Less than our current demographic profile might suggest,” said Doug Duncan, chief economist at Fannie Mae. “That puts a somewhat lower bound on how large a recession could be.”

Duncan’s primary case is a sharp depreciation of the currency as house prices rise, but not outright.

In the labor market, a fundamental shortage of workers (thanks to the retirement of boomers and delayed immigration) is likely to cause Companies should be more careful about layoffs in a recessionEspecially if it is light.

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