Headlines have not reflected cheerful optimism lately, have they? With regard to the economy, many analysts are now predicting a recession that begins in 2023. And the doomsday headlines are everywhere. But is it really so bad?
First, what’s driving the speculation of a recession? Basically, analysts look at warning signs and how things have played out in the past. Right now we know that for the past 75 years, any time inflation exceeded 4 percent and unemployment went below 5 percent, the country experienced a recession within the following two years.
So now, with the inflation rate hitting 8 percent and unemployment dipping to 3.6 percent, a coming recession looks likely based on historical patterns.
The war in Ukraine doesn’t help matters, as the global supply chain is disrupted and energy prices skyrocket.
And wage stagnation is the final factor. When inflation causes the price of commodities to rise, but wages don’t reflect the higher cost of living, every daily purchase serves as a sort of “tax” on personal wealth.
But a recession isn’t guaranteed just yet. The Federal Reserve can, and likely will, take steps to soften the blow all of the above factors inflict upon the economy. Through a policy called quantitative easing, the Fed flooded debt markets with cash to stimulate economic activity. Keeping interest rates low helped to stimulate lending.
Now, the challenge is to raise interest rates and end quantitative easing in order to combat inflation.
But can they pull it off? Time will tell. In the meantime, it is important for all of us to remember that economic upswings and downturns have always come and gone. The fact that we can read the warning signs and predict these fluctuations is a gift that allows us to prepare. So if you have questions about how to diversify your portfolio or make other preparations for a possible recession, call our office to schedule an appointment.