Is the U.S. headed for a recession? Opinion is divided on that question, with many economists warning of a recession and Wall Street bulls saying those fears are overblown. The familiar precursors of a recession have arrived: an inverted yield curve and rising interest rates on the back of high inflation (8.5% in March), with COVID uncertainty and disruptions caused by Russia’s invasion of Ukraine thrown in.
The most widely accepted definition of a recession is two consecutive quarters of declining GDP. The Fed has the wherewithal to stave off a recession, according to Wharton’s Susan Wachter, professor of real estate and finance, and Nikolai Roussanov, finance professor. “The main cause that would trigger a recession now is a spike in interest rates,” Wachter says. “The Fed’s actions so far and expected over through the end of the year will not in themselves trigger a recession.”
But the big question, according to Wachter, is what it would take for the Fed to slow the economy. “If war and pandemic shortages resolve, as the Fed expects, we can avoid an induced recession,” she says. “If not, the longer inflation persists the more likely we are to enter into a wage price spiral requiring the Fed to hit the brakes hard.”
“The U.S. economy is quite strong at the moment, but there is indeed some risk of slipping into a recession,” says Roussanov. “Its length and severity would depend in large part on the Fed’s response, and I expect it to do all it can to minimize the damage.”
Wharton finance professor Itay Goldstein is less optimistic. He notes that the onset of the pandemic in March 2020 is an important part of the background for the current debate. “The general expectation was for a longer and deeper recession, but when the data was analyzed in 2021, the conclusion was that the Covid recession was very short,” he says. “To a large extent, this was because of the fiscal and monetary intervention by the government and the Fed.”
Jeremy Siegel expects some moderation in technology stocks, which have seen much volatility so far this year after a strong run last year. “I’m not ready to say that technology [stocks are] off to the races, although there are a lot of tech stocks that are selling for fairly reasonable earnings [multiples] of 19–20 times. Anything more than that will be disadvantaged in this market.”
How long would a recession last? Goldstein says the outlook is unclear on that question, “but given the expected actions from the government and the Fed, it might not be short.” He does see a bright side, though, in the “strong labor market.” Roussanov adds: “The job market is extremely strong right now with labor shortages everywhere, but we might see it cool off if there is indeed a significant contraction.”
This story is by Shankar Parameshwaran. Read more at Knowledge at Wharton.