It’s been a significant amount of time since the last financial crisis, and many people are wondering if we are headed for a recession. The signs seem to be pointing in that direction, with many experts agreeing the markets and the US economy will get much worse before they get better. In this post, we’ll take a closer look at what’s going on and explore whether or not a recession is imminent.
Are We Headed for a Recession?
It’s been some time since the world has faced a recession. Recessions are when there’s negative growth in the economy for two consecutive quarters. However, according to the World Bank, one may be coming soon. The organization warned that most countries are we headed for a recession, with a possible return to stagflation. Something we haven’t seen in decades.
- READ MORE: 19 Recession Proof Businesses
Are We Going into a Recession? Stats Making Analysts Worry
Most economists are worried that the U.S. may be heading for a recession. Here are five stats that show the US might be headed there:
Flattening Yield Curve
This first warning sign is an economic indicator that has been historically reliable in predicting recessions. When it becomes inverted, it’s a signal that the market is anticipating a decrease in the economy’s growth and a recession will likely happen within 6 to 18 months. At present, portions of the yield curve are starting to invert.
Consumer Spending
Current inflation rates have diminished consumers’ purchasing power, resulting in Americans spending less on discretionary items. This situation poses a risk to overall consumer spending.
Economic Growth Slowing
Since the beginning of the current year, it has been reported that economic growth in the U.S. is slowing down. This is according to the Bureau of Labor Statistics (BLS), which recently released data that showed that the GDP unexpectedly shrank by 1.5%. This is the worst performance since the COVID pandemic. Are we headed for a recession?
Prices Climbing
Prices increased 8.6% on the year through May causing inflation to go higher than the 8.3% inflation expectations. This high inflation makes it increasingly difficult for consumers to afford everyday purchases.
The overall trend is clearly upward, with prices climbing 1% from April alone. This is a worrying sign for economic activity and could lead to decreased spending by consumers in the future unless the Government can bring inflation down.
Energy Inflation
In the United States, energy inflation has accelerated significantly. This is the most notable increase seen in recent memory. Fuel oil has risen dramatically, marking the largest increase ever recorded. Gasoline has increased substantially, natural gas has seen a considerable rise, and electricity has also experienced a notable uptick, representing the largest yearly increase in quite some time. As these trends continue, the question remains: are we headed for a recession?
Is Recession Coming? Stats Against
Some analysts seem to think recession risks are low, and we’re unlikely to experience one in the near future. Here are four stats that back this up:
Low Unemployment
The U.S. BLS recently released a report that states the unemployment rate is at 3.6%. This low number indicates that there are more job opportunities than there are unemployed people, which is a good sign for the economy.
Wage Growth
The stats show that wage growth is still on the rise, with a 5.2 percent increase over the past twelve months. This indicates that there is still room for wages to grow, which is good news for workers. The data also shows that private-sector production and nonsupervisory employees saw a 0.6 percent increase in their hourly earnings in May, which is also a positive sign.
Fed Raising Interest Rates
The Federal Reserve is raising rates of interest to combat inflationary pressures and cool consumer demand without triggering a recession. They have recently raised rates by 50 bps (basis points). The aggressive move to raise rates by Fed policymakers is likely to continue as they attempt to fight inflation while considering the question of are we headed for a recession.
Housing Market is Booming
The housing market has been booming over the last year. Single-family homes had the largest annual gain in values and rentals, the highest amount of home sales in 15 years, and historically low foreclosure rates. The market is in far better shape today than it was a decade ago, with homes currently selling at much higher prices.
Domestic Demand Grew
Despite supply-side headwinds, domestic demand grew at a healthy 2.5% annualized. This indicates the economy is still on track and doing well even with the supply chain issues the US has faced. If we were headed for a recession, this number would be much lower.
Recession Warning Signs
There are many warning signs that lead up to economic downturns. Here are the five main ones to look out for:
Negative Economic Growth
Negative GDP growth serves as a clear indicator of economic decline and suggests that a recession may be imminent. To assess whether the economy is contracting or expanding, it’s important to monitor gross domestic product reports closely.
Central Bank Tightens Policy
When the central bank begins to raise interest rates, it typically indicates their concern about inflation and their intention to slow down the economy.
Economic Downturn in Investments
When the Federal Reserve opts to raise interest rates, it typically indicates their concern about inflation and their intention to slow down the economy. Higher interest rates raise borrowing costs, which can make high-risk investments less appealing. As a result, this often leads to a decline in overall investment activity.
High Unemployment Rate
A high unemployment rate is a lagging indicator, indicating that it typically occurs after the economy has already started to decline. A prolonged rise in the unemployment rate may signal that we are headed for a recession.
Declining Housing Prices
If housing prices start to decline, it’s a sign that people are struggling to afford homes and that the economy may be slowing down.
The 2008 Recession
In the past, the U.S. economy suffered from a severe recession. Though it officially began at one point, there were warning signs that appeared in the labor market and consumer price index several months earlier. Are we headed for a recession?
In hindsight, there were many factors causing inflation, including inflated home prices, high levels of debt among consumers, and a decrease in business investment. One of the most important lessons we can learn from past events is the importance of monitoring key economic indicators. Are we headed for a recession?
Should Small Business Owners be Worried?
Though there are some warning signs that the U.S. economy may be heading for a potential recession, Chief Investment Officer Andy Stout thinks it may not happen this year. Small business owners shouldn’t worry but prepare for the possibility of future recessions by doing economic research and making sure they have enough cash on hand to weather any storm.
READ MORE:
- What is a Recession?
- What Happens During a Recession? Your Complete Guide
- How to Prepare for a Recession
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