Are We Heading Into a Recession? How Bad Would It Be?

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The Balance is here to help you navigate your financial life. To that end, we track the money-related questions you most search on Google so we know what’s on your mind. Here are the answers to some of your most recent inquiries.

Are we heading into a recession? 

It depends on whom you ask—some economists think a recession sometime in the next couple of years is pretty certain, while others think it’s much less likely. Many opinions are somewhere in between, putting the chances at around 30% in some cases. Here are their arguments. 

In the first camp are those who think the Federal Reserve’s inflation-fighting campaign is what will send the economy into a recession. (That’s a period when economic activity declines significantly for more than a few months, according to a widely used definition by the National Bureau of Economic Research (NBER), the nonprofit research organization that officially calls the shots on U.S. recessions.)

The Fed has launched a series of increases to its benchmark interest rate in an effort to raise borrowing costs, slow down the economy, and bring today’s soaring inflation under control by rebalancing supply and demand. But pessimistic forecasts show the rate hikes dragging the economy down so much that it causes a recession. 

Not only that, but there’s one indicator, which has proven to be a reliable predictor of recessions in the past, that’s flashed a warning sign. It’s the “inverted yield curve,” in which investors do something they don’t normally do: push the yields on shorter-term Treasury bonds higher than longer-term ones. Every time that’s happened in recent history, a recession has followed, and the yield curve did indeed invert for a couple days in early April. 

Counterintuitively, some economists also see the plentiful jobs and rising wages of today’s labor market as a bad sign. Harvard economist Lawrence Summers, a former Treasury secretary, recently wrote a paper pointing out that every time since 1955 that the unemployment rate has been as low as it is now, and wages have been rising as fast as they are, a recession has followed.

On the other hand, some point to that same robust job market as evidence that the economy is strong enough to withstand a few interest rate hikes, making a recession less likely, and argue that the unusual pandemic circumstances make the inverted yield curve a less predictable indicator this time around. Fed Chair Jerome Powell has acknowledged it will be a challenge to quell inflation without crushing the economy, but is optimistic that it can be done.

How bad will the next recession be?

Assuming there is a recession—and that’s a pretty big assumption—economists at Deutsche Bank recently estimated the unemployment rate could get a little above 5% in 2024. That’s worse than the 3.6% rate we have now, but not nearly as bad as it was during the Great Recession in 2009, when the unemployment rate reached 10%, or the pandemic-induced but short-lived recession of 2020, when the rate hit 14.7%.

In other words, it won’t be good, but it could be pretty mild as recessions go. The economists at Deutsche predicted the economy would shrink for six months at the end of 2023 and beginning of 2024 before returning to growth.

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.

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