TSI #2: 3 reasons why a recession is expected
Jun 24, 2022A recession is a significant decline in activity spread across the economy, lasting more than a few months. We almost entered one in March 2020 when the world believed production and consumption would stop. Luckily, the Federal Reserve (central bank of USA) acted swiftly and printed a vast amount of money to incentivize consumers to buy and businesses to sell, thus keeping the world from crumbling.
What has changed?
Money printing created a completely new problem that is called inflation (currently at a 40-year high). For us, this means higher prices on essential goods like food and gasoline may become unaffordable for people whose paychecks are not rising as much. Consequently, the businesses suffer as they lose customers. I am sure you have already noticed how everything is getting expensive lately.
So why is everyone talking about a recession nowadays?
The economy is showing signs of weakness. It is impossible to predict a recession but we can always notice potential signs of it. Here are three reasons why some economists expect it.
- Raising interest rates
Jerome Powell (the chairman of the Federal Reserve) has recently vowed to bring down inflation. There are many possible solutions but raising interest rates appears to be the most efficient approach. See this article for more info: INSERT LINK
You may have noticed how the stock market drops every time the Federal Reserve raises interest rates. I will not go into the details of it, but let us just say that historically, rapid interest rate growth usually caused a recession. Which is exactly what businesses, consumers and investors fear.
- Hiring slowdown
If you are reading the news, you may have already noticed a slowdown in hiring. Businesses can notice changes in spending before the economists do. That is because they are in direct contact on a daily basis. Most layoffs can therefore signal a “not so friendly” future environment. Recently, many large businesses such as Coinbase, Netflix and others began laying off employees.
- Falling house prices
If you are in the process of buying a home, do not rush it. Housing is such a major part of the economy that it usually moves with the global economy. In the last five years, home prices grew more than they did during 2002-2007. We all know how that ended. When prices rise too fast, demand tends to slow down because people can no longer afford to pay those hefty sums. Consequently, a slowdown in demand pushes the price back down and banks sell fewer loans. Home prices are still at a peak while the number of sales is consistently dropping. Not a good sign.
While many indicators point towards a recession, it is important to note that it is very difficult to predict anything with certainty.
One joke comes to mind. Economists have successfully predicted nine of the last five recessions.
To Your Financial Freedom,
Vittorio
