The economy is in an unusual situation. The normal fundamentals like jobs, wages, consumer spending, and business investment are strong, suggesting the economy is growing strongly. Yet there are growing calls that we’ll see a recession soon.
Why it matters: Those calls are coming because of persistently high inflation, which the Fed has started fighting with monetary policies that will reduce economic activity.
- Adding fuel to calls for a recession is the fact that the economy contracted by 1.5% in the 1st quarter.
Be smart: Swings in highly volatile components of GDP, namely our trade balance and inventories explained most of the contraction.
- The trade deficit increased by about $20 billion in March alone. However, in April, the trade deficit dropped by $20 billion, back to where it was earlier in the year.
- Should this hold for May and June, trade will likely not be a drag for GDP in the 2nd quarter.
Looking ahead: A recession usually requires two consecutive quarters of contraction. We are anticipating 2.6% growth in this quarter and similar growth for the rest of the year.
Bottom line: Because the Fed is now fighting inflation, and because consumers may not be able to keep spending above inflation indefinitely, the risks of a recession a year or two from now are elevated. Our Chief Economists Committee put the risk at 30% to 50%, with most seeing it closer to the bottom of the end range.
- While this is higher than usual, it is not at a critical point yet.
—Curtis Dubay, Senior Economist, U.S. Chamber of Commerce