Recessions often catch everyone off guard, but there’s a good chance everyone is 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, long or short remains to be debated, but the view that the economy has entered a period of contraction is shared by almost everyone.
“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, the classics. Rate hikes lead to recession. We’ve seen it 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 over a long period of time. But expectations for a recession 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 I like.”
The irony is that the Fed, which bailed out the last two recessions, is now responsible for the slowdown in 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 increase market liquidity. And now it is reducing its balance sheet and rapidly 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 increases throughout the economy.
The Fed is now waging a serious battle against inflation. Officials predict further rate hikes in the offing, to about 5.1% by early next year, and economists expect the Fed will likely keep rates high afterward to keep inflation in check.
Those high rates have already taken a toll on the housing market, with home sales falling 35.4% in November from a year earlier, the tenth consecutive month of declines. The 30-year mortgage rate is close to 7%. The annual rate of consumer inflation remained elevated at 7.1% in November.
“You need to reread the economics textbook, it’s going to be a classic recession,” said Tom Simons, money market economist at Jefferies. There will be significant margin compression. Once signs of a recession become more pronounced, take steps to cut spending. The first thing we will see will be cuts, probably in the middle of next year, when we see a significant slowdown in economic growth, usually inflation will come down as well.”
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 of these factors are bad enough, the NBER could declare a recession. For example, the 2020 outbreak came suddenly, violently, and had a far-reaching impact: although short-lived, it was also considered a recession.
“I hope for a short and shallow recession, but hope is only hope after all,” said Diane Swonk, chief economist at KPMG. “The good news is that we should be able to recover quickly. We have a good balance sheet, once the Fed starts to ease policy, it can respond to lower interest rates. balance”.
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 will see a recession because the Fed is trying to create one,” Swonk said. “When it says growth will stop at zero and unemployment will rise, obviously the Fed predicted a recession, but they don’t say come out.” The Fed expects the unemployment rate could rise to 4.6% next year from 3.7% currently.
