The US economy has been a subject of discussion for politicians, economists and market professionals since at least mid-2022, with debates surrounding whether the country is headed for a recession.
While the definition of the term recession influences the argument, according to the National Bureau of Economic Research (NBER), the US did not enter into a recession in the summer of 2022.
However, the Federal Reserve is determined to raise interest rates until inflation moderates, which may trigger an economic decline that cannot be denied as a recession.
Economists have been predicting a recession for months, with the consensus view that it will start early next year, while the severity and length are still up for debate.
This article explores the factors that may contribute to the next recession, including high inflation and the Fed's interest rate policies. It also analyses the likely impact on the economy, and how severe and long-lasting it might be.
According to the NBER, the most recent recession occurred from February 2020 to April 2020, with the economy beginning to grow again in May 2020 due to some states easing restrictions and direct payments and unemployment insurance aiding consumers.
This was largely done through the printing of new money supply, which added up to being more than 50% of the total supply of us dollars in the world.
Prior to the Covid Recession, the longest contraction occurred from December 2007 to June 2009, also known as the Great Recession, which lasted longer than the Covid Recession but was less severe.
The period of economic growth between these two recessions is the lengthiest expansion in US history dating back to 1854.
As we move further into 2023, the state of the economy remains a topic of much discussion and debate.
The Federal Reserve's latest economic projections show that the economy is growing at a pace of 0.5% this year and that there is no forecast for a recession in the near future.
However, there are some economists who disagree with this assessment and believe that a recession is coming.
Diane Swonk, the Chief Economist at Grant Thornton, is among those who believe that a recession is on the horizon.
She argues that the Fed is actually trying to create one, pointing to the fact that the central bank has forecasted a stall in growth to zero and a rise in unemployment to 4.6%.
Swonk believes that the Fed will have to backtrack on its decision to raise interest rates at some point, given the impending recession.
Mark Zandi, the Chief Economist at Moody's Analytics, believes that there are several positive signs for the economy.
Debt-service burdens are low, households have significant cash reserves, corporate balance sheets are strong, and the banking system is well-capitalized and liquid.
Additionally, every state has a rainy day fund, the housing market is underbuilt, and profit margins are near record highs. These factors all suggest that the economy is on relatively stable footing.
Despite these positive indicators, there are still concerns about the potential for declines in employment next year.
Layoff announcements are mounting, and the number of new jobs being created has decreased significantly.
Zandi predicts that the number of new jobs will continue to decline, eventually going to zero. This could cause the economy to cool and could potentially lead to a recession.
One factor that could impact the economy in the coming years is the Fed's decision to raise interest rates.
Traders in the futures market are already expecting the central bank to start cutting rates by the end of the year, and the Fed itself has forecasted rate cuts beginning in 2024.
Jim Simons, the Founder of Renaissance Technologies, believe that a recession could last through the end of 2024 if the Fed continues to raise interest rates.
It's worth noting that the last two recessions were caused by significant shocks to the financial system.
The recession in 2008 was generated by a lack of liquidity and trust in the market, while the pandemic recession in 2020 was caused by the global health crisis.
Simons argues that there is no similar shock on the horizon that could lead to a recession.
In conclusion, the state of the economy in 2023 remains uncertain.
While the Fed's latest economic projections show growth and no immediate threat of a recession, some economists believe that a downturn is on the horizon.
Factors such as declining employment and the Fed's decision to raise interest rates could potentially contribute to a recession.
However, other economists argue that the economy is on relatively solid ground, with several positive indicators suggesting that a recession may not be inevitable. Only time will tell how the economy will fare in the coming years.