The state of the US economy has been subject for debate for the last few weeks. Economists are warning that there is a high likelihood of a recession hitting the US economy in 2022. Although we have recorded varying opinions from different quarters concerning recession fears, it’s clearly evident that all recession indicators such as high inflation rate, gross domestic product (GDP), high-interest rates, and, inverted yield curve are here with us. It’s for this reason many people and businesses are wondering what the future holds for the U.S economy.
- Yield curve warning signal
On March 29 this year, we witnessed the inversion of the US yield curve for the first time since 2019. When the yield curve is inverted, it means that short-term treasury bills are attracting higher interest rates compared to long-term treasury bills. This is an indication that investors are losing confidence in the economy.
- Higher interest rates
The Federal Reserve Chairman gave the clearest indication of high-interest rates by mentioning a possible hike of 50 points basis that will take effect in May. This is expected to be implemented together with the shrinking of the Federal Reserve’s portfolio in an effort to stabilize the economy by taming the rising inflation rate. However, Fed response actions have a great bearing on whether the US economy will experience recession and the extent of its severity as a rapid increase in interest rates to tame rising inflation can destabilize the current economy and push it into recession.
- High inflation
The current high inflation rate is likely to continue in the foreseeable future. April inflation rate measured using Consumer Price Index (CPI) was 8.3% down from 8.5% recorded in March. Any decrease in inflation is expected to be minimal since there are many other negative forces that are affecting the US economy like an increase in global oil prices and the current war in Ukraine which will also hurt the economy.
The housing market has also experienced high inflation as house prices have spiked to a record high causing a decline in home sales as a result of the recent increase in mortgage interest rates.
According to a recent small business survey conducted by CNBC Survey Monkey, inflation remains one of the main concerns for many small businesses. There is a spike in the cost of supplies and businesses are finding it hard to pass the same price hike to consumers as they are also hard hit by the high inflation rate.
- Confidence indexes
For most small business owners, economic optimism is at its lowest level. For every ten small business owners interviewed, eight believe that a recession is inevitable by end of this year. In February this year, The National Federation of Independent Business Optimism Index dropped by 1.4 points to 95.7. This trend continues to be experienced by many business owners and that’s why there is a high possibility of a recession happening this year.
- Gross Domestic Product (GDP)
When the economy is in the recession phase, it basically means that it’s not growing. Gross Domestic Product (GDP) is the best economic tool that is used to measure economic growth. If an economy records declining GDP in two consecutive quarters, it qualifies to be in the recession phase.
The Conference Board has forecasted that the US economy will record a drop in GDP growth to 1.5% during the first quarter of 2022. This is a sharp drop compared to a 6.9% growth that was recorded in a similar period last year. However, the International Monetary Fund (IMF) is positive that the US economy will remain considerably resilient with estimated GDP growth of up to 3.7%.