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According to the most recent Economist/YouGov poll, every three out of five Americans believe that the US is now in a recession. So why is it unofficial?
Many people’s spirits have soured due to rising inflation, which has been at its highest level since the 1980s. As a result, some Americans are reducing their driving to economize on gas, eschewing expensive organic foods, and hunting for bargains to save a few bucks.
There is other awful news. The once-booming house market is weakening, making the equity-locked-in property less certain. The S&P 500 has also experienced losses. The index is down 19% for the year, wiping out trillions in value and suddenly making everyone nervous, from new investors to those who will soon retire.
However, because the official authority in charge of declaring is mum on the subject, this might be a recession in the mood.
What exactly is a recession?
As a nation’s Gross Domestic Product (GDP), which measures the value of the goods and services produced, rises, its residents become a little bit wealthier on average.
However, this value can occasionally decrease, and a recession is typically described as when this occurs twice in a row, over a period of three months (or a quarter).
Typically, it’s a warning that the economy is struggling and could lead to more immediate layoffs by firms.
In the first quarter of 2022 and the next quarter, the US GDP declined 1.6% and 0.6%, respectively. That’s a recession in the majority of nations. Just not in the US.
The Business Cycle Dating Committee, a little-known team of eight academics, picked by the National Bureau of Economic Research, a nonprofit organization, issues the official recession declaration. And the committee has so far refrained from using the R-word.
How do increased interest rates impact the US economy?
The US Federal Reserve, the nation’s central bank, is hiking interest rates to drive down prices. Making borrowing money more expensive is meant to encourage people to spend less and save more.
Product and service prices will eventually decline due to the decline in consumer demand, but it will take time. In addition, despite the recent drop in gas prices, the cost of living has continued to rise, placing a strain on the American central bank.
In a recent meeting, the Fed is anticipated to increase its benchmark short-term interest rate by three-quarters of a percent for the third time in a row in an effort to hasten the decrease in prices. Such a significant increase would push its benchmark rate—which influences many consumer and corporate loans—to a range of 3% to 3.25%, the highest level in 14 years.
The worry is that if they go too far, it might stifle economic development and result in a surge in unemployment, feeding current recession fears.
The case for a soft landing
Despite the grave predictions, many people still hold out hope for a “soft landing”—a mild economic downturn as opposed to a full-blown recession. In such a case, you might observe slower development without the turbulence connected to a full-blown slump.
The robust job market in America is what’s fueling that optimism. In August, employers hired 315,000 new employees. According to US Federal Reserve Governor Christopher Waller, that is hardly an indication of a faltering economy.
The Fed has stated that it won’t hesitate to maintain high-interest rates for as long as necessary to reduce inflation. However, the process is not going to go smoothly because the US central bank is preparing to demonstrate that it will not waiver in its determination to cut prices. If rates are increased too much, the economy can experience a recession. But, on the other hand, increase too little, inflation will continue to rise.
The President of the Federal Reserve Bank of Atlanta recently stated that a soft landing is extremely difficult, acknowledging that it is a difficult high-wire performance to pull off.