After growing for six consecutive quarters following the short, steep Covid-induced recession in early 2020, the US gross domestic product slipped by 1.4% in the first quarter of this year. The drop, which surprised some economists, is just one more sign that the US economy is beginning to slow.
That’s not necessarily a bad thing.
“The benefit of slowing economic growth should be lower inflation as demand for goods and services declines,” says Carl Ludwigson, managing director at Bel Air Investment Advisors in Los Angeles. “The risk is that economic growth slows too much, leading to a recession.”
That’s an outcome that a growing number of Americans are concerned about. Nearly eight in 10 Americans surveyed by Allianz say they’re worried that current world tensions will cause a recession, and fewer than half expect the economy to improve this year. Economists surveyed by The Wall Street Journal last month pegged the probability of economic recession, or correction, in the next 12 months at 28%.
Definitions of a recession vary, but a period of two consecutive quarters of negative economic growth is commonly considered a recession. By that definition, however, it’s often hard to recognize a recession until it’s already taken hold for six months, and there have been times when the National Bureau of Economic Research, the organization that officially declares a recession, has done so without two negative quarters . The spring 2020 period following the onset of the coronavirus pandemic is an example of such an instance.
Economists say there are other indicators they are watching to see if a recession is coming (or has already begun) in 2022. Look for:
- High inflation.
- A negative yield curve.
- Geopolitical uncertainty.
high inflation
Periods of high inflation often precede periods of recession. As prices go up, consumers – the economic engine of the US economy – can’t spend as much. That can create a chain reaction of fewer retail sales and fewer manufacturing orders, all of which often indicate a recession.
What it looks like now: Consumer prices are up 8.3% over the past year, according to the Consumer Price Index released in May. These figures follow an 8.5% increase year over year in March that was the highest rate of increase in 40 years.
A Negative Yield Curve
A yield curve is a measure of investors’ return on bonds with different durations, or times to maturity. When shorter-duration bonds (such as a 2-year Treasury note) have a higher yield than longer-duration bonds (like a 10-year Treasury note), that is a sign that bond investors may have doubts about the direction of the US economy.
What it looks like now: The yield curve has been flattening, and it briefly dipped into negative territory in early April.
Geopolitical Uncertainty
In a global economy, instability in one part of the world can have ripple economic effects on other countries.
What it looks like now: Between the war in Ukraine and ongoing concerns about the spread and mutation of the coronavirus, there’s widespread uncertainty around international trade. Meanwhile, sanctions on Russia could push gas prices even higher. The World Bank lowered its economic outlook for the global economy from 4.1% to 3.2% for the year.
OtherFactors
It’s also important to note that an economic slowdown does not always result in a recession, and that economic recessions are a normal part of modern economic cycles. While many companies go out of business in a recession, others thrive and grow in the rebound.
“None of these economic indicators are conclusive,” says Peter Earle, a research fellow at the not-for-profit academic think tank the American Institute for Economic Research. “If you look at the history of economic indicators, whether technical or those that are easier to see, there have been many times that they’ve spiked and nothing has happened.”
There are also some positive signs in the economy, including the low unemployment rate, rising wages and relatively resilient consumer spending.
While the thought of a recession can be scary, there are a few steps you can now prepare for the possibility. By building an emergency fund (ideally, three to six months’ worth of expenses) and focusing on paying down debt, if possible, you can make it easier to weather the storm.
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