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What to expect from a recession 'everyone' sees coming

 2 years ago
source link: https://finance.yahoo.com/news/morning-brief-june-25-2022-110003339.html?_tsrc=fin-notif
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What the U.S. economy could learn from past recessions
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What to expect from a recession 'everyone' sees coming: Morning Brief

Sat, June 25, 2022, 8:00 PM·6 min read
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It seems like "everybody" these days is saying we’re going into recession.

So: are they right?

I’ve covered the markets and the economy for four decades, and I can’t recall a time when more people — or at least prognosticators, economists, and bankers — were more certain that an economic downturn was imminent.

And if so many people believe that a recession is inevitable does that make it, well, inevitable? Or does it mean that a recession won’t occur? Or that any recession will at least be mild in nature? Ask this question enough ways and we're quickly into late-night dorm territory: What even is the economy?

But our primary economic problem right now is clear: inflation is running at 8.6% and the Federal Reserve is fighting this by raising interest rates. What caused this bout of inflation is mostly COVID-related, while the war in Ukraine added supply chain challenges and commodity pressures on top.

Lifting rates makes car loans and mortgages more expensive, which should temper demand. And as Fed chair Jerome Powell said in front of lawmakers this week: "I am trying to lower demand growth, we don’t know that demand actually has to go down, which would be a recession."

Federal Reserve Chair Jerome Powell testifies before a Senate Banking, Housing, and Urban Affairs Committee hearing on the
Federal Reserve Chair Jerome Powell testifies before a Senate Banking, Housing, and Urban Affairs Committee hearing on Capitol Hill in Washington, D.C., U.S., June 22, 2022. REUTERS/Elizabeth Frantz

“There were times in the 1960s and 1970s when people could see that the Fed was going to raise interest rates and cause a recession to reduce inflation and I think we're possibly in that kind of situation,” says Laurence Ball, professor of economics at Johns Hopkins. “I think the risk of a recession now is higher than any time in the last 40 years. There have been recessions in the last 40 years, but they were not things that could have been predicted.”

To my mind, though, recessions can be mild and short if the causes are anticipated and less systemic, and more severe and longer if they are unexpected and less intertwined with the core economy.

Let’s look back at some recent downturns to outline these dynamics.

Exhibit A is the COVID recession of February-April 2020. Not only was this the shortest recession in U.S. history — or at least going back to the early 1800s — this downturn was, with a 19.2% decline in GDP growth, the biggest drop in output since the Great Depression.


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