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There's a vibe shift happening in the economy as people freak out over inflation and a possible recession

Apr 4, 2022, 15:34 IST
Business Insider
Experts have started a heated debate over the probability of a recession this year, while the rest of us worry about buying gas and groceries.Joshua Roberts/Getty Images; Rachel Mendelson/Insider
  • There's a vibe shift in the way people are discussing the economy.
  • Experts have started a heated debate over whether a recession could start this year.
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When it comes to the economy, the vibe is shifting.

You may feel it in a ballooning grocery bill and rising gas prices.

Maybe your landlord is raising rent, or your friend is talking about how interest rates on their credit card, car loan, and mortgage are rising.

Inflation has been ramping up for nearly a year now. Since then, Americans' confidence in the economy has been tanking and is stuck near 11-year lows despite the broader recovery going exceptionally well.

Businesses are hiring at three-times the rate seen during the last downturn. Americans are spending money at a record pace. And daily virus infections are the lowest they've been since last summer. In 2021, the economy grew at a rate not seen since 1984. And as recently as February, Americans were optimistic that inflation would get better soon.

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Aside from soaring prices, the economic backdrop is the rosiest it's been in months. Yet inflation has completely spoiled the mood and ushered in a new era of economic malaise.

In recent weeks, something in the conversation has shifted. Google searches for "recession" spiked in mid-March, as did "yield curve" and "is recession coming 2022."

And now the financial press is fiercely debating the likelihood of a recession this year.

"Oh, here's a super weird thing," University of Michigan economist Justin Wolfers tweeted on Friday. "I've had folks in the media calling me all week about whether the U.S. economy is headed for a recession."

He cited Friday's jobs report that showed 431,000 new hires in March to argue that a recession probably isn't coming any time soon. "Umm... we're creating around half a million jobs per month, and monetary policy is still expansionary. No, this is not recessionary. At all."

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Harvard economist Jason Furman told Insider he thinks there's just a 20% chance of a recession this year, with inflation and Russia's invasion of Ukraine barely moving the needle on the odds of a US downturn.

The Federal Reserve also says no. "All signs are that this is a strong economy, one that will be able to flourish — not to say withstand, but certainly flourish — in the face of less accommodative monetary policy," Fed chair Jerome Powell said on March 16.

However, there are plenty of experts taking the other side of that bet. Strategist Albert Edwards called the Fed's view "utter unadulterated bilge" in his weekly newsletter. Goldman Sachs put the chances of 2022 recession at 35%. Larry Summers, who served as Treasury secretary under President Clinton, wrote in the Washington Post about research he recently conducted at Harvard that showed "overheating conditions of high inflation and low unemployment are usually followed, in short order, by recession."

Much of the skepticism is linked to the Fed itself. The central bank started raising interest rates in March as it looked to slow the economy and, in turn, ease inflation. Achieving that while avoiding slowing the economy too much will be an extremely difficult balancing act. Raising rates and removing pandemic-era aid too quickly could plunge the still-recovering economy into a new recession, but acting too slowly risks leaving inflation permanently higher.

Fed chair Jerome Powell has said there are "some grounds for optimism" that the central bank can achieve a "soft landing," in which inflation weakens and the unemployment rate stays at its historic lows. Others disagree, fearing it's too late for the Fed to have its cake and eat it too.

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"The Fed's application of its framework has left it behind the curve in controlling inflation," Bill Dudley, a Bloomberg Opinion columnist and former president of the New York Fed, said in a March 29 column. "This, in turn, has made a hard landing virtually inevitable."

Most Americans are more focused on more immediate issues at home — and realizing their budgets don't look so good. Recession or no, a third of Americans think their financial situation will get worse this year.

And they may be right. Many people are dipping into the savings they built up during the pandemic. That raise you got when switching jobs? It's basically worth nothing now, thanks to inflation.

Due to a combination of the war in Ukraine, supply chain disruptions, and a labor shortage, gas prices are up 38% year-over-year and food is up 7.9% over the same period.

It's all showing up in our spending growth, which slowed in February after booming throughout the pandemic. Corporate profits on the other hand are soaring, but even wealthy Americans are upset about the economy.

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This month marks one year of the Great Resignation after a record 3.8 million quit in April 2021. It's also known as the Great Reshuffle, because people didn't just quit jobs — they moved to new ones with, presumably, higher pay and better working conditions.

It's worked. Nearly half of workers who asked for a raise in the last year got one. Women — those who were able to stay in the workforce — have seen faster wage growth than men for six months, mostly due to switching jobs.

But a year later, where has that left us? Wages are up 5.6% since March of last year, but inflation ran at a 7.9% year-over-year pace in February. The excitement of switching jobs and landing more money is waning. What's a weary worker to do — quit again?

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