Whether America is in a recession or not has yet to be officially determined. But unofficially, U.S. consumers may already believe that a downturn has begun and may be accelerating after a week of consequential economic news and months of rising prices.
Last week’s announcement from the Commerce Department that the U.S. economy contracted 0.9% in the second quarter of 2022 — following a 1.6% decline in the first quarter — meets a standard definition of a recession: two consecutive quarters of negative growth.
A National Bureau of Economic Research panel will eventually decide. Although that official declaration will be meaningful, what matters most is how consumers feel and behave in the face of higher prices on many goods and services.
The rate at which inflation is increasing is at four-decade high following years of stable prices. Most paychecks have not kept up with the increased cost of living, leaving many consumers — especially those with low incomes — feeling worse off.
Also last week, as was expected, the Federal Reserve again raised a key interest rate — this time at three-quarters of a point — to curb inflation.
The painfully necessary increase is meant to decrease economic demand and thus prices. “We need growth to slow,” Fed Chair Jerome Powell said. “We don’t want this to be bigger than it needs to be, but ultimately, if you think about the medium- to longer-term, price stability is what makes the whole economy work.”
So do jobs, and in this aspect the U.S. and Minnesota, in particular, are in a better position than in previous downturns. The overall U.S. unemployment rate is a relatively low 3.6%, and Minnesota just announced its lowest unemployment rate ever, at 1.8%. Yet if the economy cools further, so could job growth.
The Fed’s previous positions of years of relatively low interest rates may have contributed to the need to raise them so quickly. But it’s important to remember that the central bank, like federal, state and local governments, was trying to respond to an anemic pandemic economy.
It’s also critical to note that the policy responses have an international context. The economy is interconnected and in fact genuinely global, and the unrelenting COVID-19 crisis and war in Ukraine, which both exacerbated the worldwide supply-chain problem, have had a hand in rising prices, too. Higher rates of inflation, slowing growth and rising interest rates are being seen in other developed economies in Europe and elsewhere, and the developing world faces a potentially more acute, even existential, food crisis due to the disruption from Russia’s invasion.
The globalization of economic headwinds led the International Monetary Fund to warn on Tuesday of a global recession. In a blog post timed with the release of the IMF’s report, titled “Gloomy and More Uncertain,” the IMF’s chief economist wrote, “The world may soon be teetering on the edge of a global recession, only two years after the last one.”
Whatever one calls it — and predictably, the Biden administration doesn’t want to use the term “recession,” while Republicans do — economic conditions have worsened. Whether the Fed can produce a “soft landing” of lower inflation without more serious damage to the economy remains to be seen. But overall, the U.S. is in a better position than most major economies, Timothy Kehoe, a University of Minnesota professor of economics and adviser to the Federal Reserve Bank of Minneapolis, told an editorial writer.
“The world is in a time of unprecedented amounts of economic uncertainty with the continuing COVID-19 pandemic, not as brutally here as in some other countries, and the war in Ukraine,” Kehoe said. “The United States is doing the best of any major country in the world right now.”
That’s a credit to U.S. citizens and policymakers. But no one can say with certainty if that relative strength will continue.