Are We Heading Toward a Recession?
The answer depends on whom you ask – some economists believe that a recession in the next few years is somewhat certain, while others think it is much less likely. Opinions range between the two extremes, with some placing the chances at around 30% in some cases. Here are their arguments.
The Potential Impact of the Federal Reserve’s Inflation-Fighting Campaign
Some believe that the Federal Reserve’s campaign against inflation is what will push the economy into a recession. The Federal Reserve has launched a series of increases in the benchmark interest rate aimed at raising borrowing costs, slowing the economy, and controlling today’s rising inflation by rebalancing supply and demand. However, pessimistic forecasts suggest that the increase in interest rates will weigh heavily on the economy, resulting in a recession.
The Inverted Yield Curve
There’s one indicator, which has proven to be a reliable signal of recessions in the past, that is sending up a warning flare. It’s the “inverted yield curve,” where investors are doing something they don’t usually do: paying higher yields on short-term government bonds than on long-term ones. Every time this has happened in recent history, a recession followed, and the yield curve did indeed invert for a few days in early April.
Strong Labor Market and High Wages
On the other hand, some economists also view the abundant labor market and high wages in the current labor market as a bad sign. Harvard economist Lawrence Summers, a former Treasury Secretary, wrote a research paper indicating that each time since 1955 the unemployment rate has reached its current level, with wages rising as fast as they are now, a recession followed.
How Severe Will the Next Recession Be?
Assuming there is a recession – and that’s a big assumption – economists at Deutsche Bank have even estimated that the unemployment rate could rise slightly above 5% in 2024. That’s worse than the current unemployment rate of 3.6%, but not as bad as during the Great Recession in 2009, when the unemployment rate was 10%, or the short-lived recession caused by the pandemic in 2020, when the rate reached 14.7%. In other words, it won’t be good, but it could be a relatively mild recession. Economists at Deutsche Bank predict that the economy will contract for six months at the end of 2023 and the beginning of 2024 before returning to growth.
Do you have a question, comment, or story to share? You can reach Deacon at dhyatt@thebalance.com.
Would you like to read more content like this? Subscribe to The Balance newsletter for daily insights, analysis, and financial tips, delivered straight to your inbox every morning!
Was this page helpful? Thank you for your feedback! Let us know why! Other
Sources:
- Grant Thornton. “How to Cool a Hot Economy: No “Good Recessions.”
- Morgan Stanley. “Yield Curve: Is This Recessionary Signal Flashing Red?”
- National Bureau of Economic Research. “A Labor Market View on the Risks of a U.S. Hard Landing.”
- Federal Reserve Board. “Speech by Chair Pro Tempore Powell on Restoring Price Stability.”
- FRED Economic Data. “Unemployment Rate.”
Was this page helpful? Thank you for your feedback! Let us know why! Other
Sources:
- Grant Thornton. “How to Cool a Hot Economy: No “Good Recessions.”
- Morgan Stanley. “Yield Curve: Is This Recessionary Signal Flashing Red?”
- National Bureau of Economic Research. “A Labor Market View on the Risks of a U.S. Hard Landing.”
- Federal
- FRED Economic Data. “Unemployment Rate.”
Reserve Board. “Speech by Chair Pro Tempore Powell on Restoring Price Stability.”
Was this page helpful? Thank you for your feedback! Let us know why! Last
Sources:
- Grant Thornton. “How to Cool a Hot Economy: No “Good Recessions.”
- Morgan Stanley. “Yield Curve: Is This Recessionary Signal Flashing Red?”
- National Bureau of Economic Research. “A Labor Market View on the Risks of a U.S. Hard Landing.”
- Federal Reserve Board. “Speech by Chair Pro Tempore Powell on Restoring Price Stability.”
- FRED Economic Data. “Unemployment Rate.”
Source: https://www.thebalancemoney.com/are-we-heading-into-a-recession-how-bad-would-it-be-5225360
Leave a Reply