Famous economist Nouriel Roubini recently said the upcoming drop in the economy would be worse than in the inflation-plagued 1970s. Amazon founder Jeff Bezos, who runs America’s second-largest company, said it was time to “batten down the hatches.” If a new recession has not started in the United States, it soon will.
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Every major indicator, except employment, is running in the wrong direction. According to the Bureau of Labor Statistics consumer price index, inflation is at a 40-year high, up over 8%. Gross domestic product has declined for two quarters in a row. The stock market has retreated almost 25% from its peak late last year. Home price growth, recently core to U.S. economic growth, has leveled out and has begun to fall in some markets.
What happens next? Larry Summers, a well-known economist, a former president of Harvard and former Secretary of the Treasury, says U.S. unemployment needs to rise to 5% to 7% to bring inflation back in line with the Federal Reserve’s 2% target. Today, the jobless rate is 3.5%. That means about 5 million people would have to lose their jobs to hit the Summers target.
Except for the early months of the COVID-19 pandemic, the jobless rate has not been near 7%. And of the jobs lost because of the virus (about 20 million), all have been added back. This process took four years after the end of the Great Recession. Unemployment reached 10% in October 2009. That means about 15 million Americans were out of work.
The fact is that the major components of the economic downturn cannot be overcome under current circumstances. Inflation has been pushed because of supply chain problems and a shortage of some goods, like grain and oil, which are critical to consumers and businesses. As the Federal Reserve raises rates, mortgage rates go along for the ride. A 30-year fixed mortgage carried a 3% interest rate last year. The number now is 7% and rising. Housing has become unaffordable for 10 million people who could buy houses a year ago. While housing prices may not collapse, they certainly will decline next year.
To the extent that earnings drive the stock market, 2023 will continue to be rough. Companies already have begun to warn their numbers will be weak next year.
The recession is coming, if it is not already here. The guessing game has moved from when a recession starts to when it might end.
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