Published August 31, 2022
The fear of a recession in the U.S. is palpable. Inflation has run amok in many developed countries. The U.S. has recently experienced 9% inflation – the highest in 40 years. The United Kingdom shared a similar fate as well. Mainland Europe is no better. In Asia, China’s economy has stalled and India is limping along. Analysts and investors are searching for good news only to be disappointed every month. What started off as a so-called “transient” pandemic-induced supply chain issue that drove up the gap between demand and supply, is now manifesting as a more widespread, and perhaps longer lasting, deceleration. In response, the U.S. Federal Reserve, Bank of England and the European Central Bank have all applied their time-tested monetary policy – raise interest rates by various basis points. This triggered the fear of overcorrection and looming recession in the U.S. Is it real? There are two schools of thought among economists – one camp thinks that recession is inevitable and the current numbers from various metrics are just lagging indicators. The other thinks that an orchestrated landing of the economy is plausible.
The July employment numbers in the U.S. have confounded the situation further; employers are hiring across sectors and employment numbers are unexpectedly high. This could increase demand if the workers have full employment and hence could spend more, not less, on goods and services. It will be interesting to see what happens in the subsequent months, but the demand is still red hot in many sectors.