Recession seems to be the pressing question at the back of everyone’s mind lately. Before we even try to answer that question, let us explore the factors that could suggest that a recession may be on the horizon.
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Inflation. Inflation is at a 40-year high. This makes it more expensive for businesses and consumers to buy goods and services. This will impact companies’ business performance and earnings. If many companies are affected, this could lead to a slowdown in economic activity and a recession.
Rising interest rates. The Federal Reserve has been raising interest rates in an effort to combat inflation. The latest interest rate at the time of writing is about 5-5.25%. This is the highest level of the federal funds rate since 2007! A high-interest rate environment is bad for companies that need to borrow money from the banks to grow their businesses. With business growth hampered, companies’ business performance and earnings are affected.
Many are concerned that raising interest rates too quickly could lead to a recession. The FOMC must carefully balance the risks of inflation and recession as it decides on interest rates.
War in Ukraine. The war in Ukraine is disrupting global supply chains and causing energy prices to rise. This also makes it more expensive for businesses to operate and could lead to a recession.
Tension between China and Taiwan. In recent years, tensions between China and Taiwan have increased. The possibility that this might escalate to a war between China and Taiwan is a serious concern for many worldwide. A war between China and Taiwan would mean potentially serious consequences, including a devastating global economic impact.
U.S. debt ceiling. The U.S. is currently hitting its debt ceiling of $31.4 trillion. If the US does not raise its debt ceiling and defaults on its debt, it would mean that the government could not borrow any more money or pay all of its bills. This would have a devastating impact on the U.S. economy and could lead to a recession.
Let’s address the elephant in the room here – is a recession happening in the near future? It is impossible to say for certain whether or not there will be a recession in the near future. However, we can consider the following factors.
U.S. labor market
The latest U.S. job market is strong. In April 2023, the U.S. added 253,000 jobs, beating expectations of 240,000. The unemployment rate remained unchanged at 3.6%.
The strong job market indicates that the U.S. economy is still growing, albeit slower. This is good news for both businesses and workers.
The latest earnings reports from companies have been mixed. Some companies have reported strong earnings, while others have reported weak earnings. However, the overall trend is that earnings are still growing, even though the growth is slower than in previous quarters.
Although nobody can say for certain if a recession is happening in the near future, assuming that the war in Ukraine, tensions between China and Taiwan do not escalate further and the U.S. does not default on its debt, even if a recession is to occur – it should be a mild one.
Regardless of whether a recession will happen, we should still learn to adopt good financial habits and prepare ourselves for the worst.
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