If you pay bills, buy groceries, and/or own a home, you have definitely felt the financial impacts of high prices since 2020. From the dinner table to the gas pump, everyday items and services have become more expensive. After all, inflation hit a 40-year high in June 2022, coming in at a whopping 9.1% (2). With all this uncertainty, there has been a lot of talk regarding the likelihood of a recession. Like any other economic situation, different sources will say different things, but based on the events of the last couple of years, a recession is likely to arrive in 2023.
Causes of Today's Volatile Economy
Since the outbreak of the coronavirus pandemic in 2020, the US economy has been nothing short of volatile. In 2022, this volatility took a whole new level when the Ukraine crisis broke out, causing the global supply chain issues that are still very present today. COVID, Ukraine, and the supply chain issues have become a difficult loop of seemingly never-ending economic struggles.
In general, when inflation becomes high, the Federal Reserve raises interest rates (2). This leads to price increases across the board: mortgages, auto loans, credit cards, business lending, etc. Since we are seeing the highest inflation in four decades, the Fed has been drastically rising interest rates to keep up. Raising interest rates can force a recession, especially in today’s climate of extreme inflation. By raising interest rates, the Fed is trying to decrease inflation, with the eventual goal of hitting 2% inflation by 2025 (3). While achieving this goal would relive a lot of today’s economic struggles, the question becomes, can the Fed pull that off after the events of the last couple of years?
Avoiding a Recession is Unlikely
While the Fed has avoided recessions in uncertain economic conditions in the past, the longevity of today’s volatile economy shows a bleak outlook for the immediate future. After all, it’s been about three years since the first coronavirus shutdown of March 2020, and the economy has been rocky ever since. In fact, the World Bank decreased its forecast for global economic growth this year, lowering an initial projection of 3% down to 1.7%. If this projection becomes reality this year, 2023 will become the third weakest annual expansion in 30 years, behind the Great Recession of 2008 and pandemic in 2020 (4). However, an alarming metric has already solidified itself after the first two months of 2023. The consumer confidence index fell to 102.9 in February, from a revised 106 in January (5).
Lastly, we can consider the unemployment metrics that impact inflation and interest rates. Currently, the unemployment rate is around 3.4%. Although this is a positive metric, as the threshold for a recession is 3.9% (1), the lack of a higher unemployment rate indicates that the Fed will likely have to maintain, if not increase, already high interest rates to combat less people looking for work. If there’s one thing the history books have taught about economics, when the Fed is stuck in a Catch-22 of trying to decrease inflation at the cost of raising interest rates, a recession is very likely to occur.
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