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Wednesday, April 27, 2022

Can the US Avoid a Recession?

Good points here.  Ultimate influence of COVID, Ukraine?

Can the U.S. Avoid a Recession?  in Knowledge@Wharton

Many economists are warning of a recession, while Wall Street bulls are saying those fears are overblown. Wharton experts weigh in on what’s ahead for the U.S. economy.

Is the U.S. headed for a recession? Opinion is divided on that question, with many economists warning of a recession and Wall Street bulls saying those fears are overblown. The familiar precursors of a recession have arrived: an inverted yield curve and rising interest rates on the back of high inflation (8.5% in March), with COVID uncertainty and disruptions caused by Russia’s invasion of Ukraine thrown in.

The yield curve inverted on March 29 for the first time since 2019. That happens when short-term treasury bills attract higher interest rates than longer-term treasuries — a sign that investors are losing confidence in the economy. Meanwhile, Federal Reserve chairman Jerome Powell brought down the other shoe on speculation of higher doses of rate increases when he signaled a 50-point increase in May (earlier increases have typically been in 25-point bursts). He also wanted to move “a little more quickly” with shrinking the Fed’s asset portfolio in an effort to tame inflation.

The most widely accepted definition of a recession is two consecutive quarters of declining GDP. According to a forecast by The Conference Board, U.S. real GDP growth will slow to 1.5% in the first quarter of 2022, down sharply from 6.9% growth in the last quarter of 2021. The White House is confident of strong GDP growth in 2022 despite inflation risks, and the International Monetary Fund shares that optimism with an estimate of 3.7% GDP growth this year for the U.S.

All Eyes on the Fed

The Fed has the wherewithal to stave off a recession, according to Wharton’s Susan Wachter, professor of real estate and finance, and Nikolai Roussanov, finance professor. “The main cause that would trigger a recession now is a spike in interest rates,” Wachter said. “The Fed’s actions so far and expected over through the end of the year will not in themselves trigger a recession.”  ... '

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