Price spikes and the Fed’s aggressive interest rate hikes sent the benchmark S&P 500 stock index tumbling to its worst performance in the first half of the year since 1970. Consumer confidence has sunk to record lows. And economists are increasingly worried that a downturn will not only happen but happen soon — a danger underscored by one widely watched Fed growth tracker.
Fed Chair Jerome Powell has begun saying the quiet part out loud: The central bank is willing to tolerate a recession if it means getting inflation under control. “The bigger mistake to make,” he said on June 29, “would be to fail to restore price stability.”
While Biden has publicly backed Powell’s efforts, raising expectations of a recession are compounding the administration’s economic woes as Democrats head into congressional elections this year.
“Everyone is screaming about inflation,” said Josh Bivens, research director at the left-leaning Economic Policy Institute. But “people would really hate a recession too.”
Americans are already pessimistic about the economy even as unemployment sits at 3.6 percent — near modern-era lows — and a contracting economy would deepen the pain, bringing a wave of layoffs and pay cuts. “The mood could get a lot more sour,” said Bivens, who argues that if the economy contracts, that would mean the Fed has screwed up by going too far in trying to curb surging prices.
Across the nation, the leading topic of economic conversation – high inflation – is swiftly morphing into growing certainty of a coming recession. White House allies are bracing for it. Republican lawmakers are trumpeting that a downturn is inescapable. Wall Street analysts are increasingly building it into their forecasts. And business leaders have rapidly moved from muted fears to openly chattering about an economic slump during investor discussions and inside their companies.
Some Democrats, for their part, are still pointing to bright spots in the economy and hoping that the central bank will manage to slow growth — and therefore bring down inflation — without tipping the country into a full-blown slump. Powell says he shares that hope and has pointed to the continued strength of the economy.
“A recession would be really problematic for the American people,” Rep. Jim Himes (D-Conn.) said in an interview. “Boy, are we ever a long way from a recession though.”
A White House official acknowledged that the economy faces a range of global risks but said that economic strengths in the U.S. — a strong labor market, consumer spending and business investment — “position us well – better than almost any other country – to build on our strong economic foundation and transition to steady, stable growth, with lower inflation.”
“And we can do so without giving up all the economic gains we’ve made,” the official added.
But foreboding questions loom large: Does the U.S. need a recession to tame inflation? How soon? And will the Fed continue raising rates even if the country enters a downturn until inflation retreats?
Dana Peterson, the chief economist at The Conference Board, a business research group, said she anticipates a “brief yet shallow” recession starting in the last three months of the year. But other factors could worsen the situation: if housing prices start to take a nosedive or if the war in Ukraine intensifies, sending oil and food prices even higher. She also said her forecast assumes some of the infrastructure spending enacted last year will begin bolstering the economy, cushioning a slowdown.
“If we don’t see that, we could see a deeper and more prolonged recession,” she said at a POLITICO “Women Rule” event.
Michael Feroli, the chief U.S. economist at JPMorgan Chase, said a downturn could even start as soon as this quarter, with recent data showing that consumer spending — the biggest driver of GDP — is beginning to slow.
“Things are looking like we’re losing altitude pretty quickly,” he said.
The government confirmed last week that the economy shrank in the first three months of the year — and the Atlanta Fed’s economic growth tracker is pointing to the increased chances of a second-quarter contraction.
If that happens, it will kick off an intense debate about whether the U.S. is in a downturn already; recessions are often defined as two consecutive quarters of negative GDP growth, although they aren’t official until confirmed by the National Bureau of Economic Research, generally long after they have begun. The bureau defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” It does not set a particular time frame of consecutive quarters.
Still, many of the factors contributing to shrinking GDP in recent months are technical in nature — companies stocked up on a lot of goods for their back rooms and so aren’t adding as much to that inventory — leading many economists to question whether it’s really a recession without the economic pain of notable job losses.
The White House official said the fact that the U.S. has added an average of 400,000 jobs over the past three months is evidence that the economy is not in recession. The June jobs figure that is scheduled to be released on Friday, July 8, will provide further clues as to the health of the employment market.
Himes, the Democratic congressman, said he thinks the Fed waited too long to begin raising rates — an argument that many Republicans have made — but he also has faith that the American economy could weather what’s ahead.
“There’s no question that growth will moderate as a result of the Fed’s interest rate increases,” he said. “But with unemployment at 3.6 percent, you’re a long way from the ugly effects of a recession.”
There’s no guarantee that a recession would actually smother inflation, though ensuing job losses would dampen the kind of consumer spending that has fueled price spikes. And the Fed’s moves are already triggering a backlash among some Democrats.
Sen. Elizabeth Warren (D-Mass.) argues that the Fed is engaging in aggressive rate hikes to fight an inflation problem that’s predominantly caused by events the central bank can’t fix — supply chain snags and Russia’s war on Ukraine. She said that might hurt the economy without helping much on prices.
“Inflation is like an illness, and medicine needs to be tailored to the specific problem, otherwise you could make things a lot worse,” she told Powell during a hearing. “And right now, the Fed has no control over the main driver of rising prices.”
Bivens of EPI said he expects inflation to decelerate naturally for a number of reasons: higher prices for food and energy are cutting into people’s ability to buy other things, government spending is waning, and wage growth has shown signs of slowing. The Fed shouldn’t feel that it needs to cause a recession to bring prices to heel, he said.
“They seem to be locking themselves into an ever-more hawkish stance, just as they’re getting close to going too far,” Bivens said.
But Charles Calomiris, a Columbia Business School professor who served as chief economist at a bank regulatory agency under former President Donald Trump, warned that the Fed would have to cause more pain than investors are currently baking in if it really intends to conquer inflation.
The best way the Fed can prevent the public from expecting persistently surging prices is if “it shows it’s willing to have a real recession until inflation gets tamed,” he said.