Recessions used to be a once-in-a-decade thing. A brief recession hit the US after the first pandemic and a second one is likely on the way. Your memories of recessions (if you are not too old) would be of the 2007 collapse and the 2020 pandemic-induced meltdown. The next one might not be as harsh but might have unpredictable outcomes.
A recession seems inevitable, considering food and fuel prices are surging. April’s consumer prices were 8.3% higher than in 2021. Annual inflation is 6.2%, excluding food and fuel prices. War in Europe and China’s rampant lockdowns have disrupted global supply chains and created scarcity and price rises. Meanwhile, the American labour market is better than before, with two new jobs opening for every unemployed individual. It hasn’t been this good since the 1950s. Goldman Sachs’ reported annual wage growth of 5.5% is also alarming companies that can’t afford it unless they pass those prices onto their consumers.
The Fed is trying to douse the fire by aggressively hiking interest rates to more than 2.5% by 2023. They hope this will bring inflation down by 2%. However, economists speculate that hiking interest rates will more often shrink the economy. The Fed has raised interests seven times since 1955, and after six of them, a recession followed. The only exception was the 1990s, as the labour market was balanced and inflation was low.
The coming recession is likely mild because consumers are still flush with cash from the pandemic stimulus, and companies are faring well. The housing prices are not skyrocketing as in the 2000s, and banks look healthy. And inflation hasn’t run wild for years like in the 80s. It is only a year above target.
However, American markets have fallen by 15%, and Wall Street is distressed. It is difficult to say how it will react to a Fed-induced recession. To make things worse, the Fed had printed trillions of dollars during the pandemic, which is partly driving inflation now.
Wall Street was bailed out once in 2009. It will be difficult for America to offer another bail-out package without hurting the rest of the economy.
All this, combined with hyper-partisan politics, creates a recipe for disaster. A recession would arrive sometime around 2024 and would be the talking point of the next election. It may ignite the fires of populism and protectionism, ensuring the return of Donald Trump.
The last three recessions aligned with US elections and saw the ruling party lose power.