Consumer price index data released last Friday caused a kind of earthquake in the markets. Inflation in the US reached 8.6%, broke a record of 41 years and panicked the investing public who fled all the risky investment channels. On the other hand, Jerome Powell, the governor of the US Bank, continues with the aggressive interest rate hike when the evening decides on another hike. This is in order to fight, among other things, high inflation in the United States and an attempt to prevent it Entering the recession Officially. However, Powell walks between the drops and is not sure he will stay dry. Interest rate hikes designed to fight inflation are dangerous for the economy. They are hurting consumption and growth and they could drag the economy into recession. That is, any interest rate may turn out to be a dangerous boomerang. But, is a recession so dangerous and scary or not like her scream?
A recession is officially defined as the US CBS identifies a significant decline in economic activity for at least two quarters. The initial slowdown was recorded as early as the first quarter of the year when US GDP fell by 1.5%. Of the U.S. economy have given initial approval to concerns about a recession.
American economy engines are starting to rust from the beginning of 2022, private consumption in US retail chains is starting to erode and money out of the pockets of the American public is running low.
Concerns about the recession have intensified recently due to high inflation and the start of central bank interest rate hikes. A recession entails declines in prices, a reduction in production and trade, and a decline in employment. Two-thirds of U.S. macroeconomists believe there will be a non-acute recession in 2023, most economists are pessimistic about the possibility of entering a recession next year, and they believe inflation will continue to be high. However, most believe the recession will not be severe.
There is no clear consensus among economists on the rate of growth below which the economy is in recession. In the United States, the official definition is two consecutive quarters in which GDP has declined. However, in a country like Israel where the rate of population growth is high, the rate of GDP growth per capita is also significant, which may be negative even when GDP growth is positive, as long as this Does not catch up with the rate of population growth. A severe and ongoing recession is called an economic downturn. In an economic downturn, the “side effects” of the recession are exacerbated, including unemployment, business bankruptcies, reduced business and economic activity.
All of these signs point in a clear direction: the engine wheels of the American economy – private consumption – are starting to creak, and the likely result of this is a recession. According to Schiller, this data is seeping into the minds of consumers and manufacturers, and these are starting to reduce spending and save more, which lowers sales data again and raises expectations for a recession in circular motion. This trend itself greatly increases the chances of the recession developing. Schiller estimates the chances of a recession in the next two years at 50% – “much higher than the normal rate.”
The most famous economic downturn was the Great Depression that began in 1929 with the collapse of the New York Stock Exchange. During the global economic crisis in 2008, there were fears that it would develop into an economic downturn, but they were dispelled. Additional periods of recession Throughout history in 1980 the economy had a short recession lasting only six months, followed by a recession of 16 months that lasted from the summer of 1981 to the fall of 1982.
The horror scenario facing analysts in the US is the “double recession” that could bring the market back to the 1980s. To reverse the rise in inflation while slowing economic growth or in other words a state of ‘stagflation’.
According to them, if the Fed takes a side of caution and raises interest rates over a longer period, this will undoubtedly slow down the economy. But in the same breath, the chances of a short-term recession will increase, as interest rate hikes will be able to stifle inflation until the rise in prices recedes to a normal, manageable annual range of 2 to 3%. The concern, according to those analysts, is that the Fed may stop raising interest rates prematurely, because it believes that slowing the inflation rate to about 3% to 4% is enough to keep the economy afloat, a range that may lead to a deeper slump.
Is the recession really scary or part of a cycle?
A recession is a routine matter and is part of a free economy. The recession actually ‘injects’ a sedative shot into the economy for several weeks / months and slows the growth rate for a certain period until the economy grows back.
The classic remedy against a recession is to increase government spending, increase government demand for goods and services. To get the economy out of the recurring cycle of declining demand – declining fortifications – layoffs and plant closures – rising unemployment – declining consumer confidence – declining demand The government is running large infrastructure construction projects while increasing the government deficit. These demands are supposed to drive growth in the economy by breaking the cycle and pay off in the future as growth is used and accelerated by the improved infrastructure.
This remedy was effective during the economic downturn of the early and mid-twentieth century but is not accepted today when the monetary approach prevailed and an excessive government deficit was considered a warning sign of the state of the economy. The monetary remedy for the recession is lowering interest rates and increasing the amount of money (printing) by the central bank. Lowering interest rates eases the interest burden on businesses on the one hand and allows them to increase debt (taking additional credit) and on the other hand reduces the attractiveness of saving in households in order to encourage consumption.
Recession VS Unemployment
The dry definition of unemployment is a situation in which a person who is able to work and wants to do so is unable to find work for pay. It is customary to distinguish between the unemployed, the person who is able to work and is unable to find work for pay, and the unemployed person who is not able to work and is not interested in work, and who is actively looking for work.
It is customary to measure unemployment according to the unemployment rate – the number of all people who do not work but are interested in working and available to work, is divided by the total labor force. In the US economy, the employment situation is almost full and unemployed, as evidenced by the latest employment report published and previous reports indicating record breaking in recent months.
The GDP report to be released in September will determine with the US economy officially entering a recession, until then we will have to wait, all signs point in a clear direction.