Will there be a recession in 2022? The odds are rising amid soaring inflation, high energy prices
The U.S. economy is still climbing out of the COVID-19-induced downturn as a robust job market powers it to cruising speed.
So why is talk of recession in the air?
Some top economists are raising the odds of a slump within the next year or so amid Russia’s invasion of Ukraine, rising energy prices, historic inflation, the stock market sell-off and the prospect of aggressive Fed rate hikes.
“The risk is uncomfortably high,” says Mark Zandi, chief economist of Moody’s Analytics.
Since the Ukraine war began, Zandi has increased his estimate of the chance of a recession in the next 12 to 18 months from 15% to 30%.
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Former Treasury Secretary Lawrence Summers puts the chance of a recession within the next 30 months at above 50%, according to Forbes magazine.
Fears of a slide may seem incongruous with an economy that’s still benefiting from strong consumer spending as vaccinations rise and COVID-19 ebbs. Employers added a booming 678,000 jobs in February and the unemployment rate fell to 3.8%, the Labor Department said Friday. Retail sales surged in January despite the spread of the coronavirus omicron variant.
And while the economy is set to slow this year from 5.7% growth in 2021 – strongest since 1984 – to a 3.5% to 4% gain, that’s still historically healthy. Americans are depleting their savings from stimulus checks and enhanced unemployment benefits but severe worker shortages continue to drive sharp wage growth.
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Yet storm clouds have been gathering.
Energy prices were already on the rise when Russia’s invasion pushed them higher on fears that U.S. sanctions on Russia – or retaliation from Russia – could propel them into nosebleed territory. The U.S. benchmark crude price closed at about $108 a barrel Thursday, up 42% so far this year. Average unleaded gasoline is at $3.73 a gallon, up from $3.41 a month ago, according to AAA.
If sanctions actually do disrupt global oil flows, crude could top $125 while pump prices reach $4.50 or higher, Zandi says. That could intensify overall inflation and prompt Americans to pull back spending, which makes up about 70% of economic activity.
Such a scenario likely would tip the economy into recession, Zandi says.
Is the Fed going to raise interest rates?
But the more likely roadmap for a downturn is a Federal Reserve that hikes its key interest rate, now near zero, too rapidly in an effort to curtail inflation, Zandi and Summers say, dampening borrowing and spending. That’s what led to two recessions in the early 1980s. In December, Fed officials estimated they’ll hoist rates three times this year but many economists expect four to seven hikes, or even more.
The Fed boosts rates to discourage borrowing, temper an overheated economy and head off spikes of inflation. It lowers them to spur borrowing, economic activity and job growth.
"Inflation is too high – we understand that," Fed Chair Jerome Powell told the House financial services committee this week. "It'll take some time but we're going to get it under control."
Summers says the Fed was too complacent about inflation last year and is now determined to catch up. Raising rates enough to rein in price increases without nudging the economy into a tailspin is no simple feat.
“It’s not like turning the dial on a machine,” Zandi says. “It’s very difficult.”
Add a tumbling stock market to the mix of threats to the economy, Zandi says. The S&P 500 index is down 8.5% this year on worries about Fed rate hikes, the war and higher energy prices. A reeling market can batter consumer confidence and spending as well as business optimism, hiring and investment.
Joseph LaVorgna, chief economist of the Americas for research firm Natixis, believes the Fed will lift rates just two or three times this year as the economy slows. A bolder campaign, he predicts, will cause a recession. He has boosted his recession odds from 15% to 25%.
LaVorgna notes that since 1970, each time the oil price increased 90% or more over the previous year, the nation was in a recession, or about to enter one. The exception, he says, was last year but only because oil was coming off a depressed level.
Crude prices are 76% above their year-ago mark.
Zandi, though, says high oil prices are less of a burden for the economy than they were 50 years ago because the U.S.is among the world’s top crude producers and the oil industry benefits even though consumers are hurt.
And so spiking prices for a year “don’t necessarily signal a recession dead ahead,” he says.