Slowcession? Richcession? Or is it just recession?
Many people expect a recession, whether in the corporate office or in the supermarket aisle.
Survey results from survey show that there are many people who fear a recession. It is easy to see why.
As it attempts to reduce inflation, the Federal Reserve increases interest rates in an aggressive manner. And a recession is often, this is the result when the central bank raises borrowing costs.
It is very scary to think about a recession. However, even though the U.S. may be heading for one, it is worth remembering that not all recessions are created equal.
A recession could be temporary, such as the pandemic-induced, short-term one in 2020, or it could be more severe, like the 2008 economic tsunami.
These are the latest predictions about what type of economic slowdown America could face, from a recession with a small R to the so-called soft land.
Recession with a small r
A recent survey of economists found that almost two-thirds believe there will soon be a recession by 2023.
Here’s the good news. Many analysts predict a mild, short recession. This is sometimes called a recession with a small rate of return.
Contrary to the 1980s when Fed’s rate hikes caused a severe recession, this year the economy appears to be resilient despite having the highest inflation rate for around 40 years.
The health of the labor force is a major reason. There have been a few high-profile layoffs at companies like Amazon and Google recently. These announcements were made to reduce staff due to over-hiring during the pandemic. The overall data shows that employers still hire.
Last year, employers added 4.5 Million jobs to their workforce. This is a remarkable recovery from the depths and devastation of the pandemic.
The Fed’s rate increases will most likely result in some job losses. In December, the Fed projected that the unemployment rate would rise from 3.5% to 4.6% (a record low).
However, this would still be a historic low number.
The slowcessation
It is a common practice in economics to try to find catchy terms for describing an event. However, they seldom catch on.
Moody’s Analytics is giving it a try.
Slowcessation is a prediction that the economy will experience a period of difficult growth, but not enough to cause a contraction. This argument is supported by many others.
Moody’s asserts that the economy has many positive factors, including strong corporate balance sheets and healthy household finances.
Moody’s believes that these could offset the negative economic effects of increasing interest rates such as higher borrowing costs and volatile financial markets.
“The economy will have a challenging 2023 under almost any scenario. However, inflation is rapidly decreasing and the economy’s fundamentals remain sound,” Mark Zandi (Moody’s chief economist).
“The economy can avoid a downturn with a little luck and some prudent policymaking by Fed. We may call it a slowcession if this happens.
The ‘richcession’
Justin Lahart, a Wall Street Journal columnist, came up with this one. Journalists also work hard to create catchy terms. However, their track record is not as good.
A recession or near-recession in which the wealthy are more affected than those with lower incomes is called “Richcession”. This would be unusual, as recessions tend to affect the less well-off more than the wealthy.
Although the current downturn is already affecting poorer people, Lahart and others suggest that, if we slip into recession, lower income workers might be more protected than they were in previous recessions.
Many businesses had to increase wages in order to hire staff during the pandemic. While wage gains at the bottom were larger than those at the highest , many workers saw their wages decline due to inflation.
While inflation is slowing, wage gains are still strong. This factor should increase the net worth of workers with lower incomes as they face possible recession.
The most recent labor data showed that sectors such as hospitality and leisure, which typically employ lower-income workers, continued to hire as Americans continued to dine out and go on vacation. Retail businesses are still more likely to retain staff, as they remember the horror of hiring workers during the pandemic.
This raises hope that people with lower incomes could be spared some of its effects.
The soft landing
There is no guarantee that the U.S. will be able to withstand a recession.
The Fed continues to claim it can raise rates without triggering a recession. Instead, the Fed is steering the U.S. towards what’s known as ” a Soft Landing“. This is a scenario where the economy slows down but not contracts and the unemployment rate doesn’t rise significantly.
Recent indicators point to a more positive scenario.
The annual rate fell to 6.5% from 9.1% in June, but inflation continues to moderate.
The Fed is also seeing some of the most worrying factors, such as a cooling wage and price rises.
This has allowed the Fed’s rate hikes to be moderated, and analysts now anticipate that the central bank will only raise rates by a quarter of a percentage point at its next meeting.
Additionally, China’s lifting of COVID-19 restrictions has generated hopes for a stronger international economy. This can also have a positive effect on the U.S. However, this could have a negative impact on both sides as China’s increased energy demand could lead to higher oil and gas prices.
The hard landing
There are many possible outcomes in an unpredictable world. The Fed’s rate increases will not help to prevent a recession or hard landing for the economy.
One, the Fed might overdo rate hikes and raise them more than necessary. It is difficult to manage interest rates accurately and making mistakes can prove fatal. For example, the Fed was blamed for keeping interest rates too low during the 2008 Global Financial Crisis.
The global economy continues to be affected by Russia’s invasion in Ukraine. It is impossible to predict the outcome of the war in Ukraine.
Another, very serious risk is the impending fight over the debt limit.
Failure to raise the ceiling will result in the federal government being unable to pay all its bills. This would trigger a default. This would cause panic in financial markets all over the globe. Even if the government avoids an actual default , just coming close could increase borrowing costs or put a dent into retirement savings.
Janet Yellen, Treasury Secretary to the United States, stated that raising the country’s debt limit is not a good idea as it could lead to another “global financial crises.”
This is the worst-case scenario and one that could lead to a recession.
Copyright 2023 NPR. Copyright 2023 NPR.
