October 3, 2022

The Usa Herald

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How close is the US to an economic recession and what are the risks?

4 min read

In 40 years inflation reached its peak. Stock values ​​are falling. The Federal Reserve (Fed) raised interest rates and is making lending much higher where the economy contracted in the first three months of this year.

In the midst of this scenario, is the United States at risk of another recession, just two years after emerging from the last one?

For now, most specialists do not forecast a recession in the near future. Despite inflation, consumers, the main drivers of the economy, continue to spend at a steady pace. Companies are investing in equipment and software, reflecting a positive outlook. And the job market is still booming, with strong hiring, few firings and many company owners eager to find more employees.

Rubeela Farooqi of High Frequency Economics wrote on Tuesday “Nothing in the US data currently suggests that a recession is imminent.” “Job growth remains strong and households continue to spend.

What is perceptible is that the economy faces serious challenges. Inflation reached 8.6% in the US, the highest in the last 40 years and which has pushed up the cost of food and gasoline, which exceeds $5 a gallon nationally.

 

¿HOW DOES THE RISE IN INTEREST RATES AFFECT?

This Wednesday the US Fed announced the increase in interest rates by 0.75%, the highest in almost 30 years.

This change will make new home mortgages, car loans, and credit card payments more expensive for millions of Americans in the country, among other things, from the grocery store to the gas pump and rental prices.

Some analysts believe that this could herald the start of a period of aggressive credit tightening by the Fed, leading to a higher risk of recession.

Higher loan rates are likely to decrease spending in areas that require consumers to borrow, housing being the most visible example. The average rate on 30-year fixed mortgages topped 5% in April for the first time in a decade and has stayed there ever since. A year ago, the average was below 3%.

Home sales have fallen in response. And so have mortgage applications, a sign that sales will continue to slow. A similar trend could occur in other markets, such as cars, appliances, and furniture, for example.

 

¿DOES THE FALL IN THE STOCK MARKET HARM THE ECONOMY?

Falling stock values ​​may discourage wealthy households — which collectively own most of the country’s stock market wealth — from spending as much on vacation trips, home renovations or new appliances.

Broad stock indices have been down for weeks. Falling share prices also tend to reduce companies’ ability to expand.

Wage growth, adjusted for inflation, would slow, leaving Americans with even less purchasing power. Although a weaker economy would eventually lower inflation, until then high prices could make it difficult for consumers to spend.

Eventually, the slowdown would feed on itself, with layoffs rising as economic growth slows, leading consumers to scale back ever more for fear they, too, may lose their jobs.

 

¿WHAT ARE THE SIGNS OF AN IMMINENT RECESSION?

The clearest sign that a recession might be looming, economic specialists say, would be a continued rise in job losses and a rise in unemployment.

As a general rule of thumb, an increase in the unemployment rate of three-tenths of a percentage point, on average over the previous three months, has meant that a recession will eventually follow.

 

OTHER SIGNS TO KEEP IN MIND

Economists also watch changes in interest payments, or yields, on different bonds for a recession signal known as an “inverted yield curve.”

Inverted yield curves commonly mean investors anticipate a recession and will pressure the Fed to cut rates. Inverted curves often predate recessions.

Still, it may take up to 18 or 24 months for the recession to hit after the yield curve inverts. A short-lived reversal occurred on Tuesday, as the 2-year Treasury yield eventually fell below the 10-year yield, as it did temporarily in April.

However, many analysts say, comparing 3-month performance to 10-year performance has a better recession-forecasting track record. Those rates are not being reversed now.

Although now, all the problems that the US currently presents in the face of the economy and I get the maximum peaks of high inflation in 40 years, the high interest rates, the fear of employee layoffs, stagnation of business growth, market imbalance; All this shows an impending recession that could probably be possible in the course of time, however market analysts have investigated high economic standards that boost the system highlighting IRAIC; which have found that it contains structural potentials that guarantee an expansion of business growth in all sectors of the economy, detecting failures and using strengthening innovation strategies, promoting development reflected in the growth and financial gains received.

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