How close is the US to recession?

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The pandemic put unprecedented pressure on global economies, affecting some more than others. The aftermath is signalling an economic downturn. US real GDP declined 1.6% y/y in 1Q 2022 and 0.9% y/y in 2Q 2022 – two consecutive quarters of decline. A equity research services phase can make stocks highly volatile.

A recession is defined as a sustained period of weak or negative growth in a country’s real GDP, accompanied by an increase in the unemployment rate. Other indicators of a recession include a decline in real income, lower consumer spending and stagnant industrial production. 

The US employment rate rose to 3.7% in August 2022, above market expectations of 3.5%.

Economists look at different sectors and economic developments before deciding a recession is imminent. They forecast risk of recession in the next two years, based on current statistics. They expect the Federal Reserve to reduce the interest rate by 50bps in September and 25bps by December.

However, some typical indicators showed positive signs for the US economy in 1H 2022; these  include growth in payroll employment, industrial production and real personal income (net of government transfer payments). Although the labour market has shown signs of growth, it would be difficult to control growing inflation without slipping into a recession.

How responsible is inflation for the imminent recession?

Leading economists believe that fighting sky-high inflation could lead the US economy into a recession. Annual US inflation was at a staggering 9.1% in June 2022, one of the highest rates since 1981. Inflation is an economic phenomenon representing a general increase in prices of goods and services, and impacts the purchasing power of a currency.

Inflation is measured using two leading indices: the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). Governments generally try to keep inflation at 2-3%. Many try to reduce it below 2%. US inflation is currently 9%, way beyond normal limits. Many of the economic tools available to reduce inflation aim to reduce aggregate demand in the economy. When market demand reduces, so do general prices of goods and services.

Reducing demand can have adverse consequences. It reduces business activity, impacting the job market – leading to layoffs and increasing the unemployment rate. Another way to reduce inflation is by cutting money supply. This is done by increasing the market interest rate to deter borrowers from obtaining more funds. Again, the goal is to reduce money supply in the economy so general prices can be lowered. However, this would also cause significant unemployment, a key indicator of recession.

Recession and equity investments

Stock prices typically drop far below their actual value during a recession. As a result, markets become highly volatile, leading to abnormal negative returns. However, as the impact of a recession wanes and recovery begins, stock prices would rally. Therefore, it is best to stay invested with a long-term goal. Choosing the best equity research services can help you make the most of your equity investments.

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