The headlines recently have been filled with recession and its eventuality. This narrative of an impending recession is not so far-fetched. After all, all the signs are pointing or hinting at it.
In this article, we will examine the likelihood of a recession occurring.
Once, the late Nobel Prize-winning economist Paul Samuelson jest that the Wall Street had predicted nine out of the last five recessions. And looks like it may be right this time. The US economy, the world’s largest economy, is showing signs of strain under the weight of decades-high inflation and rising interest rates – fueling the risk of a recession.
Investors are taking notes as equities nosedived because disappointing earnings figures and rising commodity prices push inflation higher. The Russian invasion of Ukraine has pushed prices of essential commodities to a record-high level. This event, which is outside the central banks’ control, affects the central’s bankability to pull off a soft landing, as the Fed’s chairman Jerome Powell recently admitted.
The Fed’s interest-rate hike is expected to hit the housing market the hardest. The housing market is on the frontline of the Fed’s drive to slow growth by raising the cost of credit. The mortgage rates have risen by more than two percentage points since the end of last year. The housing market leads the business cycle, and it is slowing down.
Inflation is the top concern for households. Squeezed by higher fuel and food prices, American households are taking on debt to help make ends meet. While consumer borrowing supports spending in the short term, this is not sustainable in the long term.
While the pent-up demand for automobiles, housing, and travel, as a result of savings built up in the pandemic, will provide the economy with enough momentum to carry it through the end of this year. It’s next year and beyond where the threat of recession looms.
Investments in stocks, bonds, real estate, and other assets can lose money in a recession. Unemployment tends to rise, businesses go bankrupt, the NPAs of bank increases, etc. Many bad and unpleasant activities occur during a recession. It can be a frightening experience even for those that planned for it.
There is, however, a silver lining. Recessions don’t last forever. Even the Great Depression, which lasted 10 years, eventually ended. Also, a recession is followed by a strong period of economic growth.