Last Updated on September 26, 2022 by Luke Feldbrugge
Is a recession coming in the near future? Many economists have debated this point and even considered whether or not the U.S. dropped into a recession in the second quarter of 2022. Experts believe we could be headed toward a recession, but we may see a period of growth before it arrives.
Gross domestic product (GDP) decreased in the second quarter, contracting by 0.6%, according to the second estimate from the Bureau of Economic Analysis (BEA). This came after GDP decreased by 1.4% in the first quarter this year, BEA data showed.
Traditionally, a recession is indicated by two consecutive quarters of negative GDP. And the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The bureau can sometimes wait as long as a year to declare a recession as it awaits incoming economic data.
Before the BEA released the second quarter GDP data, the White House economic team published a blog post, explaining why it does not believe the U.S. is currently in a recession.
“What is a recession? While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle.”
“Based on these data, it is unlikely that the decline in GDP in the first quarter of this year – even if followed by another GDP decline in the second quarter – indicates a recession.”
Other economists agree, saying other strong indicators such as the labor market show the U.S. is not in a recession. For example, the economy added 315,000 jobs in August, according to the Bureau of Labor Statistics (BLS). While this is a slowdown from previous months, it is still an indicator of a strong labor market.
Is There a Recession Coming?
A recession could be on the horizon, but it could be preceded by a period of growth, according to the latest forecast from Fannie Mae’s Economic and Strategic Research Group. The economist group forecasted GDP will rise to 1.4% annual growth in the third quarter followed by 1.1% to end 2022.
But from there, Fannie Mae predicts the U.S. will enter into a mild recession with a GDP contraction of 0.6% in the first quarter of 2023.
“Indicators are painting a mixed picture, most prominently the negative GDP readings in the first half of the year despite strong employment growth over the same period.”
“As the full effects of tighter monetary policy and fading fiscal stimulus work through the economy and suppress consumer spending, we expect a moderate contraction to occur in 2023 along with a weakening of the labor market.”
How will a Recession Affect Your Wallet?
Currently, the economy is stagnating as growth continues to slow. By the beginning of next year, the U.S. could enter into a mild recession. That could have several effects on consumers.
Affect on Home Sales and Home Loans
Fannie Mae predicts that home sales will fall in 2022 as economic conditions worsen and interest rates rise. In fact, total home sales for the year could drop by 16.2% from 2021, according to the mortgage giant’s forecast.
This forecast came despite a pullback in mortgage rates through August. The 30-year fixed-rate mortgage rate dipped below 5% at the end of August before rising back up in September, according to data from Freddie Mac.
But consumers could begin to take advantage of the slower housing market once again in 2023, and Fannie Mae predicts home sales will once again rise. Fannie Mae forecasted that mortgage rates will fall to 4.8% before the end of the year. This will be followed by a steady decrease in mortgage rates through 2023, with the 30-year rate ending 2023 at 4.4%.
Interest Rates and the Federal Reserve
Over the past year, the Federal Reserve has begun raising interest rates in order to tame rising inflation. At its July meeting, the Fed increased interest rates for the fourth time this year by 75 basis points, bringing the target range for the federal funds rate to 2.25% to 2.5%. This comes as inflation remains near its 40-year high after hitting 8.5% annually in July.
The Consumer Price Index (CPI), a measure of inflation, increased by 8.5% annually in July, according to BLS. This was down slightly from the 9.1% increase in June but remains near its 40-year high.
Now, even as the U.S. faces a rising risk of recession, the Fed is likely to continue raising interest rates in order to bring inflation back down. Recently, at the most recent Jackson Hole conference, Federal Reserve Chair Jerome Powell said the Fed’s fight against inflation could make it harder on Americans before it gets easier, offering the following statements:
“The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2% goal.”
“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone.”
“In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all,” he continued. “The burdens of high inflation fall heaviest on those who are least able to bear them.”
As the Fed continues to raise rates, it will push interest rates up on other products such as personal loans, student loans, credit cards and other loan products.
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