Is a recession inevitable?

Itay Goldstein, a professor of finance and economics at the Wharton School, talks about the state of the U.S. economy with inflation at a 40-year high.

Area line chart.

It feels like the economy is all over the place with prices rising at the fastest rate in many Americans’ lifetimes, making it the highest rate since January 1982, the Commerce Department reported. The job market is booming, with hiring demand red-hot, but inflation is soaring, the labor market is growing tighter, and the Federal Reserve is raising interest rates. 

However, according to Bloomberg, economists say a recession is probably inevitable but do not know when. They say the reason it is inevitable is recessions are part of the economic cycle—there is expansion, growth, and contractions, or recessions. 

“Policy is related to this recession,” says Wharton School finance and economics professor Itay Goldstein, “it’s not coming out of the blue. There was a monetary policy and fiscal policy that was conducted over the years after COVID that was intended to keep the economy up, to stimulate the economy, to keep markets up. This policy turned out to be inflationary.”

There have been 13 recessions since World War II. Some short and painful, such as what people experienced during the pandemic. Some long and painful, such as the Great Recession.

According to Goldstein, things are going to continue to be volatile and economists are concerned about this potential slow-down. He says they are worried that consumers are under pressure, and not spending on discretionary items. 

Markets are being responsive to what is going on in the world, with high inflation, the Federal Reserve raising interest rates, slowdown with supply chain, and a war in Ukraine. Economists say amid all of this, much will depend on how consumers react.

Investors have seen several straight weeks of declines on Wall Street with many of the biggest tech and digital media firms posting big drops in stock valuation. Goldstein explains what is driving this volatility.

“This is highly related to the Fed policy,” Goldstein says, “and the fact that they’re increasing rates. A basic rule in how market prices are determined is when you increase rates, it increases the discount rate that people are using to determine what the present value of stock is. When this happens, stock prices are going to go down. It particularly hurts some of these tech stocks, because for them, most of the cash flows are expected to fall in the future. The increase in rates is bringing down stock price and eventually has a bigger effect on some of these tech stocks.”

The U.S. has decades-low unemployment and wages are up across every sector. That sounds like a good thing, but Goldstein says the problem is that workers only have more power to get higher nominal wage increases.

“The fact that the job market is holding up fine is overall positive,” Goldstein explains. “However, it’s more nuanced than that because at the end of the day, the thinking is, once inflation is starting to recede, then it will generate some more unemployment. So, the low unemployment is kind of tied in with high inflation.”

With high gas prices creating major political headwinds, President Biden said earlier this month that lowering inflation was a top priority of his administration. He has already tapped the Strategic Petroleum Reserve. According to Goldstein, the most politically salient part of inflation is gasoline prices.

“The Fed is independent of the president and Congress,” he says. “They are sort of making their own decisions. Right now, it’s mostly at the hands of the Fed to increase rates and break down inflation that way.”

The Consumer Price Index shows inflation at 8.3% and the national average price per gallon of gas is at $4.40, according to AAA. Goldstein says these numbers tell us about where inflation is now and where it is going.

“The president, Congress, the Fed are trying to smooth that out a little bit and try to reduce the price of oil a little, but again, this is to a very limited extent of their control,” Goldstein calculates. “Inflation is pretty high and it’s high across the board. It’s not just one angle, it’s widespread. There was some hope this time last year that it may be all transitory, in hopes it’s all just supply and demand imbalances. However, it seems to be more serious than that. The monetary policy eventually will bring it down a little bit.”

Years after living through one of the most peculiar recessions in a lifetime, Americans are getting caught in the middle of an equally unusual recovery—and economists say there is no clear blueprint for how the U.S. economy is going to unfold.