Will America experience a recession in 2024?

The Economist –

Translation by Qassem Makki –

Not so long ago, it seemed like America’s economy would shrink about once every ten years. But just two years after the first coronavirus shutdowns, the business cycle is spinning at a tremendous speed. And another downturn seems to be on the way. Deflation is a macroeconomic term and, according to Investopedia, refers to a weakening in general economic activity for two consecutive quarters, as reflected in the gross domestic product, in conjunction with monthly indicators such as a rise in the unemployment rate. But The National Bureau of Economic Research in the United States defines it as a decline In economic activity it lasts for more than a few months and is usually shown in real GDP, real income, jobs, industrial production, wholesale and retail sales – Translator .)

If you’re like most people, your memories of past economic downturns will be overshadowed by the last two downturns: the “financial cardiac arrest” of the 2007-2009 global financial crisis and the collapse caused by the 2020 pandemic. Both were cruel and quite unusual.

By their analogy, the next downturn is almost certainly milder and less dramatic. But given the fragility of the world economy, asset markets and politics in America, it can have unpredictable and dire consequences.

There is no escaping the pressures facing the US economy. Rising food and car fuel prices are eating away at people’s spending. In April, consumer prices were 8.3% higher than a year earlier.

Even if we exclude food and energy prices, the annual inflation rate (core inflation) is 6.2%.

And supply chain problems could explode as long as wars rage in Ukraine and China and stick to zero-covid policies.

The labor market is also facing a severe shortage in the supply of labor. In March, there was one job seeker available for almost every two jobs. This labor shortage is the most severe since data were first collected in 1950.

According to a benchmark by Goldman Sachs, the increase in wages was 5.5%. It’s an everyday high and companies can not afford it unless they continue to raise prices rapidly.

The Federal Reserve promises to put out the fire. Investors expect it to raise interest rates by more than 2.5 percentage points by the end of this year. The US Federal Reserve hopes well and says that it can bring the inflation rate to the target rate (2% of GDP) without causing a decrease in economic activity.

But the facts of history suggest that taming the bank will shrink the economy. Since 1955, inflation rates have risen at seven economic cycles at the same rate as they will rise this year. In six of these cycles, the contraction repeated over a period of one and a half years. The only exception occurred in the mid-1990s when the inflation rate was low and the labor market was more balanced (between supply and demand for the labor force).

Jimmy Dimon, chairman and CEO of JPMorgan Stanley, America’s largest bank, warned of an impending economic “hurricane” on June 1.

In fact, while deflation is likely, it will be relatively moderate. In the global financial crisis of 2007-2009, the financial system froze and in 2020, economic activity stopped across sectors. Both of these declines initially had a sharp drop in GDP since World War II. But this time it will definitely be different. America is resilient in some ways. Consumers still have a lot of money they got from fiscal stimulus packages during the pandemic. The companies also made big profits.

The real estate market slows with the rise in interest rates. But compared to the late first decade of the year, it is not about hurting US banks that are in a strong financial position. The Fed is not at least facing the ordeal of the 1980s. At that time, the inflation rate was above 5% for six and a half months and the Reserve Bank had to raise the interest rate to almost 20%, causing the unemployment rate to rise to about 11%. Today, inflation has been above target for just over a year. It should be easier to throw away.

The problem is that even a slight US economic contraction will reveal blatant fragility. One of these is the commodity price crisis in most countries of the world, caused by Russia’s invasion of Ukraine.

Countries from the Middle East to Asia are facing severe food shortages and rising fuel bills. The eurozone is facing a particularly severe oil shock as it seeks to wean itself off Russia’s oil and gas resources. And around the world, the true value of family income is collapsing.

The contraction of the US economy, if it occurs, will hit the weak parts of the world economy once again by reducing the demand for its exports.

It will also exacerbate the tightening of the Federal Reserve’s monetary policy (the rate hike) and the strength of the dollar, which will lead to the alienation of the effects of emerging countries that are already underway. This is the largest sale of these bonds since 1994. The International Monetary Fund says that about 60% of poor countries are in debt or are highly vulnerable to debt.

There is another vulnerability within America and especially in Wall Street (the financial and business center in New York). This year and so far, the US stock market has fallen by 15%. This is comparable to the decline that occurred during the light downturn that began in 1991. The quick sale was not chaotic and America’s banks were accumulating capital.

But after more than a decade of cheap money (due to low interest rates), no one can be sure how ultra-rising asset prices will be affected by the “mix” of rising interest rates and economic deflation caused by the Fed.

Since 2007-2009, a market-based lending system has emerged that has not yet been seriously tested. This system includes investment funds that act as banks, massive derivatives and high-speed bond trading. And if something goes wrong, the Fed will find it difficult to save Wall Street (financial markets) again because it will at the same time force the “real economy” to struggle with high interest rates and the recent loss of fragile jobs in hyperpartmic America their policy. The US economy is likely to experience a contraction by the end of 2024, coinciding with the presidential election campaign. If the economy really shrinks, the race to win the White House in 2024 will be worse than expected.

Politics can distort a government’s response to deflation. The Fed could be dragged into a hateful political battle. After voters and business owners received gifts of up to 26% of GDP during the pandemic, they can expect the government to protect them again from financial hardship. But it is highly unlikely that Republicans (who are likely to take control of Congress after the midterm elections) will spend money to stem an economic downturn if such spending could also run the risk of saving President (Democrat) Joe Biden.

If America’s economy shrinks in the next year or two, it could change direction in the long run. The best response to an economic downturn if inflation remains high will be growth-promoting reforms such as lower rates and more competition.

Alternatively, the downturn could fuel populism and protectionism and could even send Donald Trump back to the presidency.

Three of the four previous downturns coincided with or just preceded a presidential election. And each time, the party lost power in the White House. Measured against lost GDP, a technocratic measure, the next contraction may be moderate. But it will not be if we judge it by its impact on emerging world countries, asset markets and American politics. We must not underestimate the dangers that lie ahead.

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