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Is a recession coming in 2022?

For the most part, economists said any looming recession in the US would likely be mild or moderate, in part because the unemployment rate remained near a five-decade low well into 2022. In September, the unemployment rate dropped back down to 3.5%, matching the lowest level since 1969.

washingtonpost.com - What's a Recession and How Close Are We to One?
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The debate over whether the US economy will tumble into recession in the next two years -- and if so, when -- has been the subject of heated debate among economists, policymakers, investors and business executives for much of 2022. Inflation accelerated to levels not seen since the early 1980s, leading the Federal Reserve to take aggressive action to fight it. Worries grew that the global economy would also fall into recession as central banks across the world rapidly raised interest rates.

1. What constitutes a recession?

A common rule of thumb is that it’s when the government’s hallmark measure of economic activity, gross domestic product, contracts for two straight quarters. But the National Bureau of Economic Research’s Business Cycle Dating Committee, the group of academics whose determination is regarded as official in the US, defines a recession differently: a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The group considers factors such as employment, inflation-adjusted spending and industrial production. The decline must meet three criteria -- depth, diffusion and duration.

2. What do the figures show?

Adjusted for inflation, US GDP, or the total value of all goods and services produced in the economy, posted back-to-back declines in the first half of the year. Another measure of growth, gross domestic income -- which calculates all income generated from producing those goods and services, including compensation and company profits -- was positive in both quarters, though barely so in the April through June period. Theoretically, GDP and GDI should be roughly equal, so the divergence stimulated debate over the extent to which the economy softened in the first half of the year. The Business Cycle Dating Committee looks at the average of the two measures, which was slightly negative in both quarters.

3. How close is the US to a recession?

That wasn’t clear as the fourth quarter began. The Fed rapidly increased interest rates to temper demand and tame the worst inflation in decades, fueling concerns about a downturn. But economic data released through mid-October still suggested generally resilient consumer spending and a solid labor market. Some economists said the US could skirt a recession over the coming quarters. Others disagreed. Bloomberg Economics expected the US to enter a recession in the second half of next year. Economists at Deutsche Bank AG, one of the first major banks to forecast a recession, expected one to begin in mid-2023. Nomura Holdings Inc. expected one sooner, starting at the end of this year.

4. What about the rest of the world?

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The global economy, too, faced high inflation and aggressive steps by central banks to curb it. In Europe, Russia’s invasion of Ukraine and the resulting energy crisis heightened fears of an imminent downturn. Russia progressively reduced flows of natural gas to Europe’s biggest economies, driving a surge in energy prices and squeezing household balance sheets. In August, Bloomberg Economics forecast that the euro area would slip into recession in the final quarter of 2022. The following month, Germany’s leading research institutes said that nation’s economy would likely contract by 0.4% in 2023. The Bank of England warned in August that a recession would likely begin in the fourth quarter of 2022. The UK picture grew more complicated when the government of Prime Minister Liz Truss proposed massive, unfunded tax cuts, then reversed itself due to ensuing market chaos, prompting Truss to step down. As for China’s economy, it has sharply slowed, strained by a property slump and ongoing measures to combat Covid-19.

5. How bad will a recession be?

For the most part, economists said any looming recession in the US would likely be mild or moderate, in part because the unemployment rate remained near a five-decade low well into 2022. In September, the unemployment rate dropped back down to 3.5%, matching the lowest level since 1969. Still, even a mild recession would likely mean hundreds of thousands of Americans losing their jobs. Forecasters expected the unemployment rate could rise to around 4% to 6.5%, though that would still be well below the 10% seen in the wake of the 2007-2009 Great Recession and the nearly 15% at the start of the pandemic.

6. Could a recession be averted?

In the US at least, there was still hope that the Fed might pull off a so-called soft landing -- slowing the economy enough to cool demand and tame inflation without tipping the economy into recession. A more painful route to averting an official recession would be a “growth recession,” which is a protracted period of meager growth and rising unemployment.

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.

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washingtonpost.com - What's a Recession and How Close Are We to One?
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