Economists predict a mild US recession with limited impact on employment and spending. The duration and impact of the recession depend on Federal Reserve policies and business cycle patterns.
By Brad Nakase, Attorney
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Economists are confident that the US can expect a recession. The good news is that they believe the recession will be mild because they are still seeing indicators of economic growth across some of the factors. However, it will still be a recession. While the economists may be discussing lag factors and the business cycle, everyday people are asking questions like “when will the recession end?” and “What should I expect to experience during a recession.” Let’s take a look at how economists predict the length and severity of a recession and what they are saying about this recession.
The fluctuations of the economy are called the business cycle. It is often pictured as a wave pattern with peaks and troughs, but it is nowhere near as predictable as that image would make it seem. Economists use the business cycle to examine past data to make predictions based on the movement and how external influences have affected the economy in the past.
The way the business cycle can answer when will the recession end is by allowing economists to use pattern recognition to predict economic movement. This is not an exact science; using the business cycle in this way provides an educated guess based on historical economic activity.
Currently, economists are using the business cycle to plot the likely outcome of the Federal Reserve continuing to tighten monetary policy. The Federal Reserve is seeking to reduce inflation by raising the interest rates. When it does this, consumer spending usually decreases as people have less access to credit and the rates on their variable loans have increased. This keeps inflation in check, but it can sometimes trigger economic decline.
Using a business cycle, economists have predicted that if the Federal Reserve keep interest rates at their current rate for the next five quarters, the economy’s GDP would decrease by approximately 1%. This would be considered a recession but a very mild one. This prediction is based upon the Federal Reserve not varying its interest rate for just over a year and an average business cycle.
A lag factor is something that changes after the initial event. For example, in a recession, when the economy starts to decline, unemployment rates will increase. The increase in unemployment rates is a lag factor because it happens after the initial economic decline. Economists see lag factors as confirmation of the trend (rather than a prediction.)
While lag factors don’t predict a trend, in the context of recessions, it can sometimes seem like they are being discussed as a predictor. This is because a recession usually requires several consecutive months of economic decline to be classified as a recession. That means that recessions are declared a few months after the economy has been in recession. This is where some confusion can occur.
Some common lag factors for recessions, include:
Currently, economists are not seeing the usual lag factors they would expect to see during a recession. This is due to other circumstances that have affected the lag factors. For example, recent disruptions to the automobile supply chain have created backed up demand which is only now being fulfilled, so automobile sales have not decreased. Business capital spending has not decreased because companies have been investing in new technology and equipment to address supply chain issues and keep up with innovations. While there have been a lot of layoffs, the unemployment rates have not increased because the labor market is tight. Laid-off staff have been able to find new jobs very quickly. Consumer spending has not decreased because consumers are still spending their stimulus checks from 2020 to 2021.
So, what do all of those factors mean for economists’ recession predictions?
Economists are split about whether there will be a recession. Some say that we will have a soft landing (the term for when the Federal Bank tightens monetary policy but does not cause a recession.) However, most economists say that we are headed for recession.
While there is no answer for when will the recession end, economists agree that this will be a mild recession. Most families will not be impacted by the recession as economists are predicting that there will be little impact on unemployment rates compared to previous recessions.
Economists believe that there will be little impact on consumer spending because employment rates will remain stable and household budgets healthy. So, the way the recession will impact most people is by a slightly higher cost of living. This will be due to businesses experiencing supply chain disruptions and higher costs of producing goods. However, so far, economists are predicting that this is unlikely to be severe.
The best answer we can give for when will the recession end is to say that the average recession in recent times is 8 months. Remember that inflation will eventually fall, and the Federal Reserve will change its monetary policy. Recessions don’t last forever. The economy always bounces back after a recession.
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