The American economy has been doing exceptionally well since the past year, where the unemployment rate has dropped to only 3.6% as over 6.5 million jobs have been created recently. Moreover, during the epidemic, families in the United States amassed nearly $2.5 trillion in additional savings.
Due to the booming economy, economists predict a recession is on the way.
Apart from the increase in employment, there are several external and internal forces that may lead to a recession, as the patterns seem eerily similar to the great recessions of the past.
Is the milk currently simmering in the pot before it boils over and burns everything in its path? The recipe for the perfect storm may be brewing, and here are the reasons we believe the predictions may be true.
1. Inflation
The inflation in America is out of control. Prices have reached an all-time high since the last surge in 1981, December. Everything is expensive, from baby food to apparel, fruits, vegetables, and vehicles. As we write this, inflation is at almost 9% and climbing.
Citizens and banks have only just started to recover from the short-term recession caused by the pandemic, and inflation has been one of the main reasons for a recession in the past. My suspicion is most of our readers have probably seen this last time they were at the pump or grocery store.
Some Banks, investors, and federal reserve executives have predicted that the economy will crash in 2023. In order to bring inflation down, economic growth must slow to a moderately below-trend rate, enough to induce firms to postpone some expansion plans but not enough to cause dramatic cuts in existing production and employment.
If inflation keeps rising, which is predicted, people will start to cut down on their expenditures, causing businesses to lay off workers. Furthermore, interest rates are also going to continue rising in order to reduce inflation and halt economic growth.
2. Russia vs. Ukraine
Then, there is the ongoing war in the Ukraine. The war has created huge geopolitical uncertainty that has led the U.S. to impose sanctions on Russian energy and fuel imports, causing a spike in petrol prices.
The sanctions will reportedly get stricter as many EU countries have only restricted coal imports until now. The increased sanctions could increase fuel prices even more than they are now.
3. Global Supply Chain Issues
Toss in the sanctions and inflation, and you’ve got a recipe for disaster. The Ukraine war has created global supply chain issues. However, these issues will hopefully clear out by themselves, although it has left Americans feeling less optimistic about their investments.
4. Rising Interest Rates
The Federal Reserve began increasing interest rates last month in an effort to cool consumer spending and keep prices in check. In an ideal world, the reserve bank should reduce inflation without paralyzing the entire economy.
Economists are saying that the federal bank was too slow to take action and should have increased interest rates a year ago to curb inflation. Some analysts believe that the central bank’s chances of getting it right this time are slim.
5. The Inverted Yield Curve
The yield curve determines the earnings of investors between long-term and short-term treasury bonds. The yield curve has recently forecasted an inversion, a classic tell-tale of an upcoming recession. Analysts and investors are predicting an economic growth decline since an inverted yield curve has foreshadowed all 8 recessions in the United States since 1955.
6. The best 12 Year Bull Run in History
The longest bull run in American history started in 2009 and is still driven by slow and steady economic growth. Companies have made record profits, and everyone has enjoyed low-interest rates. But how long will this bull run last? No one can tell… it might end tomorrow or last another decade, but considering all external factors like a hike in oil prices, increasing interest rates, and global uncertainty have all economists worried about the near future.
7. China’s Slow Economic Growth
While most countries throughout the world have successfully eased lockdowns as the spread of the virus has been controlled, China, is still trying to curb the spread of the virus by implementing strategies like the ultra-strict lockdown.
One of the most busiest, bustling container ports in the world has been under lockdown for two weeks, with hundreds of cargos awaiting in queues, which has created significant supply chain issues. Moreover, experts have predicted that China won’t be able to achieve its target growth of 5.5% this year.
The increased supply chain issues and slow economic growth in China will have repercussions in the US, leading to price hikes and increased interest rates.
8. Top Investors Predictions
Several top hedge fund players, including Jeremy Grantham and Michael Burry (“The Big Short” fame) are expecting a massive financial market meltdown. All top investors have stated that they are all expecting the biggest market crash the world has ever seen. For most of the modern era, investors have only seen growth and bull runs in the current market; some suggest a market crash will be a “good opportunity” for the millennials to learn. The economic growth bubble keeps getting bigger, but how much more can it take before it bursts?
The Takeaway
While many have predicted a recession, some forecasters are a bit more optimistic and suggest that an economic growth slow-down is a more likely scenario. It doesn’t have to lead up to a recession.
Many believe that this time the federal bank will successfully bring inflation under control, while others suggest that a “smooth landing” is highly unlikely. A severe fiscal policy will most certainly send the economy into recession. Another major concern is the supply chain issue which restricts meeting consumers’ demand. The supply chain issues will only worsen with the war in Europe and a new Covid variant leading to further lockdowns in China.
There have also been speculations of World War 3, which could send the whole world into turmoil. Putin’s war against Ukraine has created significant natural resource repercussions, and there have been no signs of reduced gas prices.
Moreover, the unpredictable consumer and business behaviors, market volatility, inflation, high employment rates, the pandemic, and all other issues have made it very difficult for policymakers to determine where the economy is headed and what to do next.
What Can You Do?
However, considering the past recessions and the timeline that led to them have all the same signs that we are witnessing in the current market today. Will history repeat itself? Will the federal bank be able to curb the inflation and make a ‘soft landing’? Will there be a World War 3?
There is a lot of precariousness, but what the average American can do now is to put efforts into improving their financial positions by increasing retirement and emergency savings and reducing spending in the face of rising inflation.