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US economy is ‘nowhere near a recession this year,’ says economist

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US economy is 'nowhere near a recession this year,' says economist

With volatile markets, high inflation and looming interest rate hikes that will make borrowing more expensive, many Americans wonder if the economy is heading for a recession.

Goldman Sachs chairman Lloyd Blankfein said over the weekend that “this is definitely a very, very high risk factor” and that consumers should “be prepared for it.” However, he hedged his comments by saying that the Fed “has very powerful tools” and that a recession “is not baked on the cake.”

The odds of a U.S. recession next year have been steadily rising, although they are uncertain, according to a recent Bloomberg survey of 37 economists. Their probability is fixed at 30%, double what it was three months ago.

To put this number in context, the threat of a recession is typically around 15% in a given year due to contingencies and numerous variables.

Bottom line: “The chances of a recession this year are very low,” said Gus Faucher, chief economist at financial services firm PNC Financial Services Group. However, “it becomes more difficult in 2023 and 2024.”

What determines whether the economy enters a recession

According to the National Bureau of Economic Research, which officially declares a recession, a recession is a significant drop in economic activity that spreads across the economy and lasts for more than a few months.

A key indicator of a possible recession is real gross domestic product (GDP), the inflation-adjusted value of goods and services produced in the United States. It fell at an annual rate of 1.4% in the first quarter of 2022 for the first time since the early days of the pandemic. With many economists seeing 2 percent as a healthy annual growth rate for GDP, a negative start to the year suggests the economy may be shrinking.

Another factor is rising inflation, which has recently shown signs of slowing. But it was still well above the Fed’s 2% target benchmark, with an 8.3% year-over-year increase in April, according to the latest consumer price index data.

With high inflation, price increases have outpaced wage growth, making things like gas and rent more expensive for consumers. For this reason, the Fed hiked rates as it did in March and May, with five more rate hikes expected this year. Those rate hikes have made borrowing more expensive for businesses and consumers, discouraging spending.

While many economists still expect GDP to grow in 2022, the pace of the decline in inflation is unclear.

signs of economic strength

However, there are also positive economic indicators to consider. Employment data continues to look good, as the US economy added 400,000 or more jobs in April for the 12th straight month. Despite interest rate hikes and inflation, employment levels and consumer spending are currently strong.

“Ultimately, inflation from higher prices needs to play a role in actual consumption behavior,” said Victor Canalog, head of Moody’s Commercial Real Estate Economics.

He noted that U.S. consumer spending rose 2.7% last quarter: “People are still spending more, but when are they going to start spending less?”

Despite these positives, risks remain. Faucher said the Fed has done a good job with its monetary policy because doing too much or too little to control inflation could further damage the economy.

“Rising rates are designed to cool growth and hopefully not push the economy into recession,” Fauci said. But he said if the central bank “raises rates too much, it could push the economy into recession”.

“That’s why I’m more focused on 2023 or 2024 because we’re going to feel the cumulative impact of all these rate hikes that we’re going to see over the next year and a half.”

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