Is the U.S. teetering on a recession?

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Posted at 12:56 PM, May 19, 2022
and last updated 2022-05-19 16:14:38-04

With stock markets swooning, inflation running hot and Russia's war in Ukraine devolving into a prolonged stalemate, Americans are understandably worried about their financial prospects and the state of the U.S. economy.

The stock market on Wednesday suffered its biggest drop in two years as large retailers acknowledged that rising prices are hurting their profits. Wall Street economists are also sounding the alarm, while a growing number of chief executives and small business owners say they expect a slump later this year.

Although some signs suggest the economy remains on solid ground, other indicators augur trouble. Here's what experts are saying about the risk of a recession.

Why are economists worried?

The economy unexpectedly shrank in the first three months of the year as U.S. imports rose and exports fell.

More troubling is that the most punishing bout of inflation in decades is starting to affect retail businesses: Industry bellwethers Walmart and Target both reported disappointing earnings this week, saying that higher costs for food, fuel and transportation reduced their profit margins. Both trimmed their earnings expectations for the year. In another sign consumers are pulling back, Amazon reported its first quarterly loss in seven years.

As financial markets slide, meanwhile, wealthy people are taking their money out of stocks and stockpiling cash in a move to reduce their exposure to risk. A recent Bank of America survey of investment fund managers found that the portion of investments they have in cash is the highest it's been in the post-September 11 period. The Wells Fargo Investment Institute expects a recession sometime in the next year and is advising investors to put their funds into utilities, seen as more reliable investments.

With technology stocks leading the overall market lower, tech companies that went on a hiring spree in the last two years are abruptly reversing their hiring plans. Meta, Uber and Twitter have slowed or paused hiring, while Netflix, Peloton and Robinhood are laying off workers.

"Decisions to reduce spending, postpone expensive purchases, defer or freeze hiring are all indicators of a potential slowdown," John Kemp, senior market analyst at Reuters, wrote in a recent column. "[I]f there are enough companies and households behaving in the [same] way the likelihood of an imminent slowdown is much higher."

Currently, the odds of a recession are about 30%, according to research from Moody's Analytics and a Wall Street Journal survey of economists.

What could cause a recession?

A major concern is that the Federal Reserve will raise interest rates too high, too fast, choking off economic growth.

Rising rates curb inflation by making it more expensive to borrow money, which makes it pricier for consumers to spend — especially on big-ticket items like housing and cars — and more costly for businesses to grow and hire workers. But if the Fed miscalculates, sharply rising interest rates could shut off growth, causing a recession.

"If they have to act faster, they could overreact," Alfredo Coutino, director of economic research at Moody's Analytics, told CBS News, alluding to Fed policy makers.

"Because inflation is going to be higher, they will have to raise the interest rates higher. If economic activity is hurt because the Fed is overreacting, the economy is going to decelerate, and we [could] have low growth and high inflation," he said.

Global disruptions stemming from Russia's war in Ukraine or from COVID-19 shutdowns in China could also reverberate in the U.S., raising the odds of a downturn.

"If we have shortages of raw materials, of agricultural products, because the crop from Ukraine is destroyed by the war, because Russia imposes bans on exports of grains … or because the zero-COVID policy in China prolongs the disruption in the Chinese economy, the U.S. is going to suffer," Coutino said.

What about "stagflation"?

High consumer prices could also drag down economic growth, creating a "stagflation" situation in which prices are rising faster than businesses can expand. For the economy, that could lead to the worst of both worlds — slower hiring and broader economic activity along with persistent inflation.

Treasury Secretary Janet Yellen alluded to that possibility on Wednesday, noting that global food prices have shot up to record highs.

"The economic outlook globally is challenging and uncertain," she said. "Higher food and energy prices are having stagflationary effects, namely, depressing output and spending and raising inflation all around the world."

In the U.S., consumer spending is expected to slow later this year if only because many workers' pay hasn't kept up with inflation.

"That raise you got this year — that's already gone," Coutino said. "Of course that is going to limit and restrict your purchasing power, and then guess what, household consumption is going to slow down, and that is going to impose a restriction on the economy."

Still, Coutino sees only a small chance of stagflation, a view shared by most economists. But slowing growth remains a cause for concern.

"A global stagflation scenario similar to that which engulfed the world economy for much of the 1970s still seems unlikely, but the risks of a mild stagflation scenario have clearly been rising in recent weeks," said Andy Cates, senior economist at Haver.

Why could we end up dodging a recession?

While some economic signals are flashing yellow, plenty more suggest the current economic expansion has a ways to run. For instance, Industrial production rose for the fourth month in a row in April, hitting a 15-year high and indicating that supply-chain shortages are fading.

"It is not just consumer spending powering the economy forward," Michael Pearce, senior U.S. economist at Capital Economics, said in a report.

And consumer spending — which accounts for two-thirds of economic activity — remains strong, with retail sales growing at a healthy pace in April and bank accounts fatter than they were before the pandemic.

"There's still a fair amount of strength in the consumer," Christopher Rugaber, an economics reporter for the Associated Press, told CBS News. "With strong consumer spending and steady hiring, the economy is in generally good shape for now. And we'll see how it lasts."

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