Economic experts are on the lookout for signs of a rapidly looming economic recession while the Federal Reserve tries to tame the highest inflation in almost four decades. One economic gauge recently indicated that a downturn might be on the horizon.
Another closely monitored measurement from the Atlantic Reserve Bank suggests the American economy may decline in the second quarter in the gross domestic product, which is the measure of services and goods produced in a country.
Recessions are technically characterized by high unemployment and defined by two consecutive quarters of negative growth, negative or low growth, slowing retail sales, and falling income. The GDPNow tracker shows that spring economic growth was flat at 0%, equaling a steep decline from the previous 1.3% estimate on June 1 and 0.9% by June 8.
U.S. economic growth is already slowing. According to the Bureau of Labor Statistics, last month marked the worst performance since the spring of 2020, when the economy reacted to the Covid-19 induced recession. The gross domestic product unexpectedly shrank in the first quarter of the year by 1.5%. If the economy declines again in the second quarter, it could meet the criteria for a recession.
Recession is an increasing possibility
An increasing number of Wall Street firms and economists, including Wells Fargo, Bank of America, and Deutsche Bank, are forecasting a possible recession in the next two years, causing the Federal Reserve to aggressively work toward tightening monetary policy to bring inflation down to its desirable 2% target and cool off consumer demand.
The Fed is working to achieve a rare economic feat as it has moved into a mode of inflation-fighting and hopes to cool consumer demand to keep prices from rising, all while not demolishing demand and pushing the country into a full-blown recession.
While policymakers are attempting to find a soft landing or sweet spot, history has shown that the Fed has often struggled to tighten policy while preserving economic growth successfully. The Fed recently voted to raise the benchmark interest rate for the first time since 1997, an increase of 75 basis points, as it tries to rein in inflation.
An additional interest rate increase is expected in July, putting the federal fund’s target range between 2.25% and 2.50%, the steepest climb since the beginning of the Covid-19 pandemic. Interest rates have traditionally been raised to increase higher rates on business and consumer loans, which forces employers to cut back on spending, slowing the economy.
Fed Chairman Jerome Powell has said they are not trying to induce a recession but has admitted that the odds of a successful “soft landing” are growing slimmer, and a downturn may be impending. There’s a path for us to get there,” Powell admitted, “It’s not getting easier. It’s getting more challenging.”