The United States on the road to recession, but without fear – Economic policy

Let’s start with the bad news: The US is heading into a 2023 recession. Over the past 50 years, whenever inflation has hit an annual rate above 5%, it’s taken a recession to go away. graph below). The current episode will be no exception. Only when growth is in the red will the United States be able to contain unbridled price pressures.
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Let’s start with the bad news: The US is heading into a 2023 recession. Over the past 50 years, whenever inflation has hit an annual rate above 5%, it’s taken a recession to go away. graph below). The current episode will be no exception. Only when growth is in the red will the United States be able to contain unbridled price pressures. Some good guys will be sure to point out that US growth was already negative in the first half of 2022. This downward trend, however, coincided with a remarkably strong job market, so much so that the National Bureau of Economic Research, whose mission is officially identifying recessions, he did not set out to declare one. However, next year will not be so reluctant. As growth slows, the unemployment rate will rise, leaving little doubt that the US economy is contracting. The immediate cause of this recession will be the Federal Reserve (Fed), which expects to continue to tighten monetary policy in 2023. In September 2022, the median forecast of Fed leaders was for an upward revision of interest rates to a threshold of 4.6% in 2023, against 3% today. However, inflation will persist into early next year which will certainly encourage them to go further, up to about 5%. Financial markets, which are already under pressure after several interest rate hikes in 2022, will face fresh worries as indebted companies and spendthrift households struggle to pay their high interest rates. But the picture is not so bleak. Indeed, everything points to the next recession being moderate. Over the past year, the number of vacancies has far exceeded the number of job seekers. This means that even if the slowdown in growth causes companies to revise their recruiting campaigns downwards, it will not lead to mass layoffs. The unemployment rate will rise slightly above that of the low periods of 2022, but it will not rise as it often has in recent recessions. The United States has many other safety nets that will help cushion the impact of the economic downturn. And that’s largely thanks to the length of pandemic support programs. By the end of 2021, state governments had accumulated reserves of more than $250 billion, about double from 2019. Households, meanwhile, have about $1.5 trillion in additional savings compared to pre-pandemic times. Companies have also made significant savings when needed. All of these reserves will decline with the recession, but they should be enough to cushion budget cuts, even with slow growth. During 2023, the US economy will take a completely different turn. Disinflation will eventually kick in, only to evolve into visible deflation from month to month as the recession hits. That should end the Fed’s rate-hiking cycle by mid-year, and then the main focus will shift to when it starts to ease policy. After having fought so hard to limit the surge in prices, it will be some time before the tariffs are revised downwards. However, the recession accompanied by rapidly falling inflation will lead it to lower rates by the end of 2023 in an attempt to control the decline. While short-term US economic turmoil will dominate the headlines in 2023, the biggest stories will have long-term implications. President Joe Biden secured a string of major legislative victories as he passed his infrastructure, climate and technology investment plan. Most of the work to lay the groundwork for this project will be done during 2023. Gray clouds, however, obscure these few rays of sunshine. Despite the slowdown in growth, it will be difficult to find the manpower needed to carry out a project of this size, which will increase costs. Furthermore, the government is likely to draw criticism that the project is too ambitious and wasteful, especially for semiconductors, whose sector has gone from a global shortage to oversupply. At the end of 2023, the US economy will emerge from its mild recession, with inflation declining. The new question then will be whether the US’s costly project to revamp its industrial landscape, driven largely by the government, turns out to be a shrewd or overly ambitious strategy. Simon Rabinovitch, US Economics reporter at The Economist Source: The Economist. Exclusively licensed to Trends-Tendances.