What to know about a potential recession
There’s been quite a bit of unsettling economy news this week, stoking fears that we are in a recession. Inflation is already at a 40-year high, the Federal Reserve is raising rates to combat that and the GDP report released on Thursday showed economic growth shrunk for the second quarter in a row. This week, I’ll explain what’s going on and how it might affect state and local finances.
Why we are not in a recession (yet)
Two major economy-related events occurred this week. The Bureau of Economic Analysis released its second quarter GDP report, showing the nation’s economic output shrank by 0.9%. While the news was expected, it still means six months of economic contraction which has kicked off the “Are we in a recession?” debate.
Second, the Fed raised rates again on Wednesday to combat inflation, which climbed to 9.1% in June compared with a year earlier. Fed Chair Jerome Powell said the three-quarters of a percentage point hike is meant to dampen consumer demand so things don’t get worse later. “If you fail to deal with it in the near term,” he told reporters, “it only raises the cost of dealing with it later.”
Powell and other administration officials stress that we are not in a recession because other economic indicators (job growth, consumer spending) are still strong. However, 65% of registered voters who responded to a recent Morning Consult/Politico poll said they believe we are already in one. Meanwhile, President Biden’s opponents are blaming the pandemic stimulus spending for supercharging the economy while Fox Business News has gone ahead and declared us in a “technical recession.”
Related:
Learn about the committee officially in charge of declaring a recession
Interesting facts and trends about recessions, via Investopedia
Who to believe: I go with economists on this one and their prevailing message is that yes, the economy is slowing but more bad stuff needs to happen for it to be a recession. “The labor market—one of the best indicators of the current state of the economy—remains resilient, consumer spending on services is picking up and the fall in GDP is more than accounted for by the short-term dynamics of the inventory cycle," Brian Coulton, chief economist of Fitch Ratings, said in a statement.
Earlier this week, Mark Zandi, chief economist at Moody’s Analytics, said he believes inflation has now peaked. He expects it to be at 6% at the end of this year, around 3% at the end of 2023 and reach the Fed’s target of 2.5% by the spring of 2024.
Zandi said as long as the worst of the economic fallout from the supply chain disruptions and Russia’s invasion of Ukraine are behind us (and we avoid any new major catastrophes like, say, a hurricane hitting the Gulf Coast and taking out an oil refinery), he thinks we’ll skate by. “Clearly conditions are eroding, the economy is weaker and we’re very vulnerable,” Zandi said at the Urban Institute’s State of the States event. “The recession risks are uncomfortably high…we’re going to need a bit of luck on this one.”
What the volatile economy means for state budgets
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