Is the US economy in a recession and taking the world with it?

The United States is facing rising recession fears as the Federal Reserve, the country’s central bank, remains bullish in fighting high inflation and officials increasingly talk about the need to impose some economic pain to get price pressures under control, several economists told Al Jazeera.

“There’s still a good amount of strength in the labour market and that’s going to allow the Fed to remain aggressive in fighting inflation,” Edward Moya, a senior market analyst at OANDA, a New York-based foreign exchange firm, told Al Jazeera.

“Price pressures are not going away. And when we take a look at energy prices, the downward move that we’ve been appreciating appears to be over and it looks like oil and gas prices are gonna be heading higher once again,” he said.

The Organization of Petroleum Exporting Countries and its allies, a grouping known as OPEC+, last week decided to cut oil output by 2 million barrels of crude per day.

“That increases costs, not just for energy, but everything we do and everything we buy. And so the price of everything goes up, including food,” EJ Antoni, research fellow at The Heritage Foundation, a conservative think-tank in Washington DC, explained.

US gross domestic product (GDP), a measure of goods and services output, contracted 0.6 percent last quarter after shrinking 1.6 percent between January and March. The common rule of thumb for recessions is two consecutive quarterly declines in GDP.

“We’ve already had the recession in the first six months of the year. It looks like the third quarter is going to come in positive but after that, all bets are off. I think we’re gonna go negative again,” Antoni said.

Economists have not been unanimous in that belief as some indicators point to underlying strength in the economy.

The US trade deficit narrowed in August to its lowest level in more than a year. And Goldman Sachs last week boosted the US third quarter GDP estimate by a full percentage point to a 1.9 percent annualised rate.

The Biden administration continues to argue that the economy is resilient, pointing to the lowest unemployment rate in five decades and unwavering consumer confidence.

But nearly seven in 10 Americans recently said they are worried about a recession and four in 10 said they are financially unprepared to handle one if it were to hit before the end of 2023, according to a poll by Bankrate, a New York-based financial firm.

So what are the key metrics pointing to? How do economists make sense between plummeting markets and a resilient labour market? And what does a US recession mean for the global economy?

Majority of CEOs anticipate a recession in the next year

More than eight out of 10 CEOs recently said they anticipate a recession during the next 12 months, according to a new survey from accounting firm KPMG (PDF). Out of the 1,300 CEOs at the world’s largest companies KPMG surveyed, 73 percent said they believe that an economic downturn will disrupt growth.

About 39 percent of the CEOs have implemented a hiring freeze while 46 percent are considering downsizing their employee base during the next six months, KPMG found.

And it is difficult for them to ignore the data.

Wall Street has plummeted in the past year. The S&P 500 – a proxy for the health of retirement and college savings accounts – closed the third quarter at its lowest level in almost two years. The tech-heavy Nasdaq 100 has dropped nearly 33 percent so far in 2022 while the Dow Jones Industrial Average has lost more than 20 percent.

Cryptocurrencies, which surged in popularity and price during the pandemic, have also nosedived. The world’s top digital coin, Bitcoin, shed more than 60 percent of its value in the past year while the second-largest cryptocurrency Ethereum dropped 61 percent.

US mortgage rates have more than doubled in the last year, locking millions of Americans out of homeownership.

“We could have had a mild, short recession if the Fed, Congress and president acted much sooner but unfortunately, now, there’s a tremendous amount of economic pain that’s already baked into the cake,” Antoni told Al Jazeera.

“One of the tragedies of the Biden administration is that they had the benefit of hindsight. They could have looked back at their immediate predecessor and learned from what worked and what didn’t, but they just continued on with bad policy.”

Strong labour market or a ‘desperate’ one?

Tens of millions of Americans quit their jobs during the height of the pandemic in what is now widely known as the Great Resignation. Since then businesses from gas stations to doctors’ offices have struggled to find workers.

OANDA’s Moya explained that as long as job openings remain high, the Fed will continue to raise interest rates to make borrowing more pricey in hopes of balancing demand and supply.

“The Fed is going to be locked in a corner where they have to tighten policy much more aggressively,” he added.

New data showed last week that the number of job openings in the US plunged by 1.1 million and jobless claims increased more than expected. The unemployment rate hit a half century-low of 3.5 percent in September however signaling a tight labour market.

But not everyone sees it that way.

“I don’t see a strong labour market, I see a desperate labour market,” Heritage Foundation’s Antoni told Al Jazeera. “We have a disproportionate number of people working multiple jobs. That gooses the jobs numbers because every time a person works another job, they are counted as another job holder.”

The US trade deficit narrowed in August to its lowest level in more than a year, suggesting underlying strength in the US economy [File: Carlos Barria/Reuters]

“We’ve had a lot of small businesses fail from pandemic lockdowns and if those people go to work for a large corporation, they are now counted in those surveys. So again, even though the number of jobs hasn’t actually changed, the number of people employed, the number in the survey, goes up,” Antoni said.

Global setbacks

The COVID-19 pandemic and war in Ukraine have caused “extraordinary shocks” to the global economy, the World Bank recently said (PDF), warning that advances towards eliminating extreme poverty by 2030 have essentially come to a halt.

The number of people living on just $2.15 a day increased 11 percent in 2020 — from 648 million to 719 million, according to the World Bank.

A US recession would cause deep pain in the developing world, Richard Kozul-Wright, director of the globalisation division at the United Nations Conference on Trade and Development (UNCTAD), told Al Jazeera.

The UN agency issued a dire warning last week that a global slowdown could potentially inflict worse damage than the 2008 financial crisis and the 2020 COVID-19 shock.

“If a financial shock in the US is triggered, there is no limit to the downside,” Kozul-Wright said.

“The US ultimately had the policy space to shore up both its economy and its financial system if it finds the political appetite for more bailouts. But most countries in the world, especially in the South have no real safety net,” he added.

As for emerging markets, OANDA’s Moya said many of them have been aggressive in their fight against inflation.

“What’s been killing them is this relentlessly strong dollar,” he explained. “A recession in the US would mean that the dollar’s days are over. And some relief would be good news for emerging markets.”

But again, it is a very fine line. If the US dips into a long period of sluggish growth, emerging markets are going to struggle. Major exporters to the US such as China, Mexico and Canada would feel pain if US demand weakened for a prolonged period of time.

As for how severe a US recession could be, Moya echoed the sentiments of many economists Al Jazeera spoke with: “It’s still too soon to have strong conviction with that call just because we don’t know exactly how sticky inflation is going to be and how resilient the economy is.”

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