- The U.S. may be heading for another recession, but it probably won’t be a bad one.
- Goods spending has finally slowed, enough to trigger a “moderate” recession, one economist said.
- Americans are generally in good financial shape, which means growth is likely to slow only modestly.
If you panic about the looming possibility
don’t worry too much, because the next recession may not be like the Great Recession or the sharp downturn in the early days of the pandemic.
Wall Street giants like Deutsche Bank and Bank of America A recession is being forecasted to begin next year, citing the Fed’s inability to fight inflation without bringing the economy to a standstill.
But even if those predictions come to light, it may not be that bad.
For the first time since the early 1990s, economists see the country on a fairly normal recession track. That’s because, according to experts, it’s more of a correction after a year of massive spending across the economy. With Americans under control, the numbers could show the economy shrinking for a few quarters, but the country won’t feel the pain of previous 21st-century recessions.
While American demand for the product appears to be insatiable, Susan Stern, president and chief economist of the Institute for Economic Analysis, told Insider that consumers don’t appear to be as financially overextended as they were in 2008.
“I don’t think we’re overspending so much that consumers are going to hold back for a long time,” she said, adding that continued spending should “bring some stability in terms of employment.”
The coming recession also looks very different from the coronavirus recession. Daily COVID-19 infections, while above levels seen in early 2022, are still below the highs of the Delta and Omicron waves.the restrictions are almost completely removed, and Summer travel season in full swing. Today’s economy has more in common with pre-pandemic conditions than it did in early 2020.
“The type of recession we’re looking at isn’t like a full-blown severe, massive downturn in consumer spending,” Brett Ryan, senior U.S. economist at Deutsche Bank, told Insider.
Services to win next recession as people yearn to get back there
Brett Ryan, senior U.S. economist at Deutsche Bank, told Insider that at the heart of a recession will be a return to normality in economic activity. “Normal” in this context means we buy less stuff and move to face-to-face service.
Ryan said Americans have faced a “perfect storm” in their wallets in recent months as stimulus aid has dried up, inflation has soared and interest rates have begun to climb. The trend will mostly hit Americans’ high spending on goods like furniture, cars and clothing during the pandemic — not services like movie theaters, bars and transportation.
The shift won’t be sharp enough to cause a catastrophic recession akin to the Great Recession, but it will pull growth down.
“As long as spending on goods falls back to pre-pandemic trends, it should be sufficient for a mild recession,” Ryan said.
At the same time, the service sector is expected to boom during the economic downturn. Deutsche Bank believes spending on services such as healthcare, accommodation and travel will continue to climb as these industries return to pre-pandemic trends. Ryan said the uptick would keep economic activity from falling even further.
The recession, then, is likely to be a bifurcation. Bank of America senior U.S. economist Alex Lim told Insider that Americans “have accumulated a lot of wealth over the course of this cycle” through stimulus, increased savings and a financial market rebound that has only recently reversed. Their spending will keep the services sector rebounding, while goods producers face a sudden awakening as the country enters a new normal.
The biggest risk lies with the Fed
There are several factors that can turn a mild recession into a severe one. Chief among them is inflation, particularly the Fed’s efforts to bring price growth to more sustainable levels.
Central banks have a daunting task on their shoulders. Raising interest rates too quickly can severely dent demand, leading to a sharp drop in spending, corporate layoffs and a plunge in economic growth. Moving too slowly, however, could keep inflation worryingly high and further erode Americans’ purchasing power.
The central bank stressed that it will remain flexible in its plans to tighten monetary policy.However, supply chain issues continue to push inflation higher, and Fed Chairman Jerome Powell has said policy makers Don’t expect an upcoming solution. This puts the onus on the Fed to bring demand more in line with supply, but doing so without stalling the recovery will be extremely difficult.
“The margin of error is too narrow,” Lin said. “Monetary policy is a blunt instrument. [The Fed] Can’t really slow down very precisely. “
For consumers, the Fed’s fight against inflation is like a fever: uncomfortable, but necessary for a cure. Higher interest rates have raised borrowing costs across the economy, making mortgages, auto loans and credit card debt more expensive.
However, the policy is implemented with a lag of about 6 to 12 months, meaning it will not weigh on inflation until later in 2022 at the earliest. That means, at least for a while, Americans will be dealing with rising interest rates and higher-than-normal price growth.
“Yes, there may be some pain associated with returning [2% inflation]” Fed Chairman Jerome Powell said at a May 4 news conference. “But the biggest pain is not dealing with inflation and letting it become ingrained. “
There are some early signs of light at the end of the tunnel. There are “no clear signs of excessive leverage” in the economy, and household balance sheets are much better than they were in the years following the financial crisis, Lim said. He added that once inflation trends lower, there is reason to believe that spending will continue to grow and economic growth will stabilize at a healthy level.
“As consumers emerge from the next recession, we think the chances of a quick recovery could be considerable,” Lim said. “It’s just a completely different environment than in the post-financial crisis period.”