Recessions often catch everyone off guard, but there’s a good chance everyone will be prepared for the next one.
Economists have been predicting a recession for months, and most think it will start early next year. Whether it is deep or shallow, whether it is long or short, remains to be discussed, but the view that the economy has entered a contraction period is almost everyone’s consensus.
“Historically, when inflation is high and the Fed is raising interest rates to tame inflation, that leads to a downturn or recession,” said Mark Zandi, chief economist at Moody’s Analytics. This happens all the time, classic rate hikes lead to recession. We’ve seen this before. When inflation rises and the Fed responds with higher interest rates, the economy eventually collapses under the pressure of higher interest rates .”
Zandi is one of the few economists who thinks the Fed can avoid a recession by raising interest rates for an extended period of time. But expectations for a downturn are now high, he said, and “usually recessions creep in. CEOs never talk about recessions.” Everyone in the world is talking about a recession, every economist is talking about a recession. I’ve never seen anything like it.”
The irony is that the Fed, which bailed out the past two recessions, is now responsible for slowing the economy. The Fed cut interest rates to zero to help stimulate lending and added trillions of dollars of assets to its balance sheet to boost market liquidity. And it is now shrinking its balance sheet and quickly raising interest rates from zero in March to 4.25% to 4.5% this month.
But in the last two recessions, the Fed didn’t have to worry about high inflation eroding the purchasing power of consumers or businesses and spreading supply chain and wage gains across the economy.
The Fed is now waging a serious battle with inflation. Officials forecast more rate hikes ahead, up to around 5.1 percent by early next year, and economists expect the Fed will likely keep rates high after that to keep inflation in check.
Those high rates have already taken their toll on the housing market, with home sales falling 35.4% in November from a year earlier, the 10th straight month of decline. The 30-year mortgage rate is close to 7%. The annual rate of consumer inflation remained high at 7.1% in November.
“You have to re-read the economics textbook, it’s going to be a classic recession,” said Tom Simons, money market economist at Jefferies. There will be significant compression in margins. Once the signs of a recession become more pronounced, they will take steps to cut spending. The first thing we will see is cuts, probably in the middle of next year, when we will see a significant slowdown in economic growth, usually Inflation will also drop.”
A recession is generally considered to be a prolonged economic downturn, usually lasting more than two quarters. The arbiter of the recession The National Bureau of Economic Research (NBER) analyzes the depth, scope and duration of the slowdown.
If any one of these factors is severe enough, the NBER could declare a recession. For example, the outbreak in 2020 came suddenly, violently, and had a wide-ranging impact. Although it lasted for a short time, it was also considered a recession.
“I hope for a brief and shallow recession, but hope is just hope after all,” said Diane Swonk, chief economist at KPMG. “The good news is we should be able to recover quickly. We have good The balance sheet, once the Fed starts to ease policy, can respond to lower interest rates. A Fed-induced recession is not a balance sheet recession.”
The Fed’s latest economic forecast shows the economy growing at a rate of 0.5% in 2023, but does not predict a recession.
“We’re going to see a recession because the Fed is trying to create one,” Swonk said. “When it says growth is going to stall to zero and unemployment is going to rise, obviously the Fed has predicted a recession, but they don’t say Come out.” The Fed forecast that the unemployment rate could rise to 4.6% next year from the current 3.7%.