If you just look at the surface, things are not looking rosy right now in the U.S. economy. Sure, employment is higher that it has been in years and salaries are actually climbing, but does that make a solid economy all on its own? There is a bit more to it all than that and when you dig just slightly beneath the surface, you may be afraid of what you will see. Is the next economic recession just waiting in the wings here in 2022?
What Defines an Economic Recession?
A recession is a real decline in economic activity that lasts for months or more commonly even years. Experts declare a recession when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time. Those are the standard golden rules of economic recession that have been around for as long as people have been defining it.
So by all of those standards, we aren’t in a recession and on the surface, we seem to be doing fairly well. High employment, sales booming so much so that businesses can’t seem to keep items in stock (yes, for reasons we all know), and income for those who are working is rising. So what is there to worry about?
There’s One Factor That Is Very Ugly: Inflation
You already know that very uncomfortable feeling that you get when you shop for your groceries each week. Inflation makes prices go up and they are going up faster than your paycheck is growing. That is a problem.
No matter how much you earn each week, if you are losing ground on your food bill, your utility bill, your gasoline bill, your rent payments, your adjustable mortgage payment…well, you get the idea here. You may think it’s all roses when you see your check, but you know it’s not.
Oh, But the Fed Has a Plan, Right?
You remember the Federal Reserve, don’t you? These are the folks that gave you the word “transitory” when it came to inflation. They assured you back in 2021 that there was little to be concerned about when it came to inflation and that everything was going to be just fine and soon. Could they have been more wrong?
It took them longer to admit the error of the projections than a team of monkeys banging on a typewriter could have figured it out (my apologies to monkeys everywhere).
But now, the Federal Reserve has a new plan and is taking a more aggressive stance to clamp down on inflation by raising interest rates.
With inflation now at a 40-year high, they predict raising interest rates by half a percentage point during the next three meetings in May, June, and July will fix it all and make everything good again. That’s the line from the Fed. Do you believe it and do you think that no pain will come from those actions?
What Happens Next?
There are some financial experts who are short-sighted. They think that employed people making more and “resuming” normalcy by going out, attending events, and wining and dining as before can’t possibly mean something bad is on the horizon.
Now I am not saying those at the Fed think that way. They are pretty smart people, but it’s a fact that even smart people are wrong now and then. Even I was wrong a time or two, but not since I planned to attend the 1964 World Series in Philadelphia and the Phil’s collapsed with just 12 games to go (you can look it up). I was 15.
They are smart, but they are panicking. When the Fed raises rates, it becomes more expensive to borrow money for people and for business. When interest rates on mortgages, credit cards, and other loans increase and the Fed makes that happen, the Fed hopes to slow down the economy without causing an economic recession. That’s their hope just like they were hoping for when they said “transitory” to describe inflation last year.
Into an Economic Recession?
The Fed’s actions are likely to trigger a recession and likely before the end of 2022, in my opinion. We are on that road and I am not sure there’s any way to avoid it now. The best outcome we can hope for is that it’s not severe and it’s short-lived.
While raising interest rates will eventually help push inflation closer to the Fed’s new target of 2.6%, I don’t think that can be achieved by the end of 2022. It is more probable that it is likely a 2023 or 2024 reality, but in any case, it will be a slow process.
One more result of all of this will be higher unemployment again. That will happen as the inflation numbers begin to drop through 2023 and 2024.
What It May Look Like a Year From Now
With the control of inflation as the priority, unemployment rates begin running higher during a recession. That starts a different kind of economic cycle.
Historically, individuals and families struggle to find work in order to pay the bills each month. If you have ever lived through an economic recession before, you know how it can affect everything, especially the emotional impact on people as they struggle. Right this moment, it doesn’t seem like the struggle is preventing anyone from spending despite the high cost of everything.
The Oil Factor
If you haven’t been paying attention, you still have noticed that the price of oil and gas has climbed astronomically since a year ago. Filling your car or paying to heat your home is proof of that. So now that oil is a “thing” with the Ukraine War and Russia, it magnifies what is happening. That war may linger on and on for years, we just don’t know. What we do know is that it, on every level, has made life more difficult and will have both humanitarian and economic impact on us for years.
Now is the time to regroup your thoughts about spending and planning the next few years economically. The good news is that all cycles come and go, and those with a good plan weather the storm much better that those who don’t have one.
It all comes back to basics. Budgeting and planning your goals make a difference and in this circumstance, it’s very important to do it. Having just lived through such dramatic conditions as we all have in 2020 and 2021, do we really want to pretend that more trouble can’t be on the horizon? That is the reason that if you weren’t ready before, you must be now.
Are you thinking economic recession for 2022? Are you spending or saving and what can you do to defend your wallet against what might be out there? Do you worry about a possible recession, and if not, why not?