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US recession: Fed’s relentless rate hikes likely to finally trip up American economy, consumers’ resilience

By Ryan Hogg

Edited by Jekaterina Drozdovica

13:46, 24 November 2022

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Will a US recession hit next year amid rising interest rates and slowing demand? Photo: Pixels Hunter / Shutterstock

Consumers are growing worried about the prospects of a US recession, two years after a traumatic downturn caused by COVID-19.

Is the US in a recession as aggressive rate hikes force demand down, or will the country’s economy be able to weather a bumpy incoming economic storm?

What is a recession?

A recession is technically defined as two consistent quarters of negative growth in gross domestic product (GDP), suggesting an endemic issue in the economy tied to falling demand. It’s a crucial metric in assessing the health of an economy, with rising unemployment in the labour market typically following a contraction in GDP. 

In the US though, a recession is announced by the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, made up of a group of economists. They use a variety of metrics, including GDP, unemployment, personal income and personal consumption to determine when a significant drop in economic activity has occurred.

Recessions can be caused by factors both external – like the global financial crash of 2007 – and internal to a domestic economy, like a rise in interest rates, a symptom of a cyclical downturn in economic activity. 

Rate hikes can push an economy into recession by increasing the price of servicing debts like credit cards and mortgages, as well as borrowing costs and expenses for businesses. That hurts overall demand as well as confidence and can plunge the economy into contraction. 

In the US, the Bureau of Economic Analysis (BEA) publishes GDP data which helps gauge how close the economy may be to a recession.

Recessions can vary in length, but according to Kiplinger, the typical recession since World War Two has lasted around 11 months.

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US recession history

US recession history tends to align with downturns experienced by the global economy, in part because of the US’s strong influence on it.

The last one was a deep but brief recession at the onset of the Covid-19 pandemic, when GDP contracted by more than 8% in the second quarter of 2020 as a result of intense lockdowns to contain the spread of the virus. 

US real gross domestic product (GDP), 2000 - 2022

It quickly bounced back, with output in the second quarter of 2021 increasing by more than 12%. The country’s recovery was buoyed by pent-up demand and huge government stimulus sent to aid lockdowns. Unemployment quickly fell, down from a peak of 14.7% in April 2020 to 4.2% by November 2021.

The US endured a much longer recession in 2008 and 2009 following a huge crash in financial markets that bled into a property market crisis and caused huge pain among businesses. Unemployment peaked at 9.9% in December 2009 and took nearly eight years to fall back below pre-recession levels. 

Is the US in a recession right now? 

There currently isn’t a US recession as it has not been declared by the NBER, though the country did slip into a technical recession in the second quarter of 2022 with a second consistent quarter of negative GDP growth.  

But there are several factors pointing to a growing likelihood of a recession in the coming months. 

Inflation kicked off woes in financial markets at the start of the year, a trend exacerbated by Russia’s invasion of Ukraine, as well as a slow realisation that price rises weren’t transitory but indicated a bigger clog in supply chains.

While painful, inflation can often persist without pushing the economy into recession. Moves by the US Federal Reserve (Fed), on the other hand, which sticks to a 2% target for price rises, look increasingly likely to push the US into a recession.

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The Fed has hiked interest rates by 375 points from a zero lower bound at the beginning of the year.  

Elsewhere, major US stocks have taken a hammering this year, losing trillions in value amid a sell-off IN risky assets. The S&P 500 (US500), the main stock index for US companies, has contracted 20% this year in response to rising inflation and ensuing rate hikes. While not an indicator of a recession alone, flagging stock markets give a strong indication of   

S&P500 (US500) live price chart

In another asset class, bonds are teasing signs of a recession as the Treasury bill (T-bill) yield curve inverted, a sign that investors are more pessimistic about the future and a phenomenon that has preceded multiple previous recessions. 

And it’s not just investors that appear pessimistic. Consumer confidence dipped in October following two months of gains, according to the Conference Board, with expectations of future economic conditions near decade lows.

US labour markets however remain a bright spot amid a growing sea of gloom. Employment has bounced back above pre-pandemic levels, while 3.7% unemployment is still near all-time historic lows. Labour market tightness, with vacancies still high, suggests unemployment won’t rise to the levels of the last two recessions.

“Labor [sic] demand has grown quickly relative to supply since early 2020, which has resulted in a tighter labor market,” The Brookings Institute wrote in October

“Even as the recovery in jobs from the pandemic recession has been relatively speedy, labor force participation has remained depressed particularly among older people, likely reflecting retirements that occurred somewhat earlier than they would have in absence of the pandemic.”

In one sense, a strong labour market is good news, indicating a recession will be less painful for the economy as a whole. But in another, it puts more pressure on the Fed to hike interest rates, and has been one of the drivers behind its aggressive hikes this year.

Inflation also looked like it was beginning to lose its bite in October, with a 7.7% reading lower than analysts had expected, suggesting the Fed might loosen its strict regimen of hikes and spare the economy more pain next year.

US economic forecasts for 2022, 2023 and beyond

Among US recession forecasts, there appears to be a growing consensus that one will occur. There is, though, some divergence on how deep and how long it will be.

In early November, The Conference Board predicted that a recession would hit the US economy at the end of 2022, as negative economic growth couples with a jump in unemployment, which the group said could peak at 4.5%. They wrote:

“Soft economic growth seen over the course of much of 2022, coupled with persistently high inflation readings, are consistent with a stagflationary environment…While easing supply-side constraints and a more hawkish monetary policy should help cool inflation over the coming quarters, rising interest rates will tip the US economy into a broad-based recession.”

The Conference Board’s US economy predictions indicated that the recession would last three quarters, while inflation would remain above the Fed’s 2% target until at least 2024.

The World Bank expected the US economy to shrink by 0.2% in the 2023 financial year, following a 1.2% contraction in 2022.

In its US economic outlook of 18 November, Barclays predicted that the US economy could go into a recession in 2023. The banks analysts wrote:

“Central banks have signalled that rate hikes will pause early next year, but a pause is not a policy pivot…With inflation unlikely to fall quickly enough, in our view, 2023 could be the first year in decades when monetary policy in the US and Europe will be restrictive even with economies in recession. That sets the stage for a very sluggish recovery in 2024.”

Fannie Mae expected, as of 21 November, the US to experience a mild recession beginning in the first quarter of 2023, with GDP growth of 0% over the year. The group said:

“While households in aggregate continue to hold a large amount of “excess savings” relative to the pre-pandemic trend that could be used to fuel further consumer spending, the stock of these savings is not held evenly, and many consumers appear to be increasingly tapping into consumer credit to maintain spending.”

Final thoughts

Note that analysts’ predictions about the US economy’s recession may be wrong and should not be used as a substitute for your own research. Always conduct your own due diligence before trading, looking at the latest news, a wide range of commentary, technical and fundamental analysis.

Remember, past performance does not guarantee future returns. And never trade money you cannot afford to lose.

FAQs

How many recessions has the US had?

The US has had 11 recessions since 1948.

When was the last recession in the US?

The last recession in the US was in mid-2020 following the onset of the Covid-19 pandemic.

Is the US in a recession now?

The US is not in a recession yet, but economists, including the Conference Board, World Bank, Barclays, and Fannie Mae expected it to enter one in 2023. Note that their predictions can be wrong. Always conduct due diligence before trading.

How long does a recession last?

Recessions can vary in length, but according to Kiplinger, the typical recession since World War Two has lasted around 11 months.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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