Will the US Economy Lead the World Into a Global Recession?

Will the US Economy Lead the World Into a Global Recession?

2022-06-24 • Updated

The US economy added about half a million jobs in March, while the unemployment rate was at just 3.6%. The Dow Jones index is near its historic highs. Households have saved an additional $2.5 trillion during the pandemic and are spending it now, helping the economy. Despite all this good news, expectations of a recession are very high on Wall Street. Deutsche Bank, Goldman Sachs, and Fed officials all expect the US economy to enter a recession over the next two years.

What are the reasons for such negative forecasts for the US economy? 

1. History repeats itself

Current economic conditions resemble the previous pre-recession periods in US history. Over the past 75 years, whenever inflation exceeded 4% and unemployment fell below 5%, the US economy entered a recession in two years. Today, US inflation is approaching 8%, and unemployment has fallen to 3.6% in March.

2. Inversion of the yield curve

The jump in commodity prices, the Fed's decision to raise interest rates, and the war in Ukraine have all pushed the yield curve to flatten in the past weeks. When the yield curve inverts, recession fears grow. The curve's inversion occurs when the 2-year Treasury yields are higher than the 10-year yields. That means investors don't trust the economy's strength in the long term and prefer to bet on the short term because they believe that the economy will slow down. 

The curve inversion has predicted every recession since 1955, with only one wrong prediction. A recession occurs after yield curve inversion over a 6-24 month period, so we see all recession predictions by 2023.

3. High inflation will eat up savings

High inflation will force consumers to reduce spending so much that it will push the economy into recession. Due to higher prices, inflation will eat away household savings and consumers spending. That will force them to spend less, which will slow demand and growth even more. The IMF cut its forecast for US economic growth to 3.7% this year.

4. Too tight, too quickly

The Federal Reserve has denied the threat of inflation from the start, reacted too late, and now a sharp tightening cycle could push the US economy, and the global economy with it, into recession.

Indeed, the rapid shift from ultra easing, pumping cheap money, ignoring inflation to aggressive tightening, hiking rates, and withdrawing liquidity from the markets will cause a brutal shock to the US economy. The Fed, which will press the brakes hard to fight the highest inflation in 40 years, could, without noticing, undo the fragile recovery from the COVID-19 recession two years ago.

5. Demand overpasses supply and growth slows

Consumer spending increases and demand for services, goods, homes, and cars rises again. However, due to rapid inflation, higher oil prices, and global instability, supply chain problems already affected by COVID-19 have increased. That widened the spread between demand and supply, which led to higher prices rising more and more. 

The Fed began a series of rate hikes last March to curb inflation and slow consumer spending. It's expected to raise rates at each of its remaining six meetings in 2022 to ease US spending so that demand matches supply. So a bit slower growth might be helpful to reduce inflation, but slowing too much could push the economy into recession. If there's a recession in the US this year or next, it will most likely be because of the Fed's aggressive efforts to fight inflation. 

The United States may avoid a recession, but the road will not be smooth and easy. The Fed should reduce inflation while maintaining low unemployment and stable economic growth. Will the US central bank be able to do that?

TRADE NOW

Similar

Bulls Are Coming Back
Bulls Are Coming Back

The US dollar index rose to 105.40 after the Fed’s 75-basis-point key rate hike, while the stock and the crypto markets fell. However, during the past few days, investors and traders returned to risk assets as they expect inflation growth to slow. Moreover, Jerome Powell, the head of the Federal Reserve, announced the Fed might start cutting the key rate by 2024, which is the most evident hint of an upcoming market reversal.

What to Trade on June 20-24?
What to Trade on June 20-24?

Last week was shocking!  The US dollar gained more than 2% against other currencies ahead of the 75-basis points rate hike by the Federal Reserve on Wednesday but dropped after the announcement…

What to Trade on June 13-17?
What to Trade on June 13-17?

Last week was intense!  The US dollar gained more than 2% against other currencies on investors' concerns regarding one more inflation wave in the United States caused by the fuel crisis…

Latest news

What to Trade on July 4-8
What to Trade on July 4-8

Last week was bearish for risky assets such as stocks, oil, gas, and crypto. Will the upcoming week change the situation across the markets? Let’s look at it in detail!

When Will the US Stocks Bear Market Bottom?
When Will the US Stocks Bear Market Bottom?

US stocks have delivered their worst first half of a year in more than 50 years triggered by the Fed's attempt to control inflation and growing concerns about recession.

The Dollar's Strength or Other Currencies' Weakness?
The Dollar's Strength or Other Currencies' Weakness?

The value of the US dollar continues to rise, but is this because of the strength of the dollar itself or just the weakness of the euro, Japanese yen, and British pound? Since the beginning of the year, the US dollar index has been up 8…

Deposit with your local payment systems

Be on top of your game

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

Beginner Forex book

Beginner Forex book will guide you through the world of trading.

Beginner Forex book

The most important things to start trading
Enter your e-mail, and we will send you a free Beginner Forex book

Thank you!

We've emailed a special link to your e-mail.
Click the link to confirm your address and get Beginner Forex book for free.

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera