Poll shows that the US economy is headed for a shallow recession: Here’s what it means

Poll shows that the US economy is headed for a shallow recession: Here’s what it means

This comes as the country is witnessing soaring inflation

A new poll by Reuters shows that a large majority of economists said that the United States economy is headed for a short and shallow recession sometime in the coming year. This comes as the country is witnessing soaring inflation, which was at a four-decade high, prompting the Federal Reserve to announce several interest rate hikes since the beginning of this year in a bid to combat it.

What is a recession and a shallow recession?

A recession can occur in varying degrees and leave a significant impact on the economy; typically when an economy faces two consecutive quarters of negative gross domestic product (GDP), it could be said that a country is witnessing a recession. However, there are various additional formulas and complexities surrounding the discussion. 

For example, in the context of the US economy, the COVID-19-induced recession only lasted for two months, which is one of the shortest cycles on record, after the economic activity plunged in April 2020. Furthermore, the official call that an economy is witnessing a recession is taken by a panel of economists convened by the National Bureau of Economic Research (NBER).

Among other indicators, the NBER accounts for non-farm payrolls, retail sales and industrial production, however, the private non-profit research group also said that there are “no fixed rules” about measures and indicators that contribute information to the process or how they are weighted in their decisions.

The group's definition of a recession is a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.” It also believes that the depth, diffusion and duration of this downturn need to be met individually. Additionally, “extreme conditionals revealed by one criterion may partially offset weaker indications from another,” said the NBER.

Notably, the official call indicating that an economy is witnessing a recession is made at least a year or more after the downturn event has already occurred. Therefore, another approach, more focused on determining the onset of a recession, is the employment-based Sahm rule which says that when the three-month rolling average of the unemployment rate rises half a point from its low, an economy has entered a recession.

The rule was created by and named after a former Fed economist Claudia Sahm and used to determine the onset of a recession, which is quicker than official calls. In contrast to the aforementioned example of the COVID-19-induced recession, some other recessions can be deeper and scarring for the economy like the Great Recession or the Depression whose impact was so adverse that it reportedly took a decade or more to revive the labour market.

The speculations of the US economy entering a “shallow recession” have been around for quite a few months now, it is where the economic growth contracts only marginally and for a limited time. This comes after consecutive increases in interest rates by the Feds amounting to an overall hike of 375 basis points, since its first one in March, earlier this year which has sparked worries about an impending recession.

Poll shows that the US economy is headed for a shallow recession: Here’s what it means
Explained: Early signs of a recession; who decides if it's officially begun?

Reuters polled 84 economists between December 2 and 8 who unanimously expect the Feds to raise the interest rate by 50 basis points on December 14 as the rate of inflation is running well above the central bank's two per cent target. However, after raising the interest rates by 75 basis points for the fourth consecutive time, the economists believe that it will be a “slightly softer” hike of 4.25 per cent to 4.50 per cent this time around.

Economists who as a group can be slower with their forecast of recessions, as mentioned earlier, have also said that the probability of a recession in the upcoming year or two is at least 70 per cent which is up seven per cent from the last poll, said the report. Furthermore, 35 out of 48 economists said that the recession would be shallow and short, while eight economists said it would be long and shallow and four said there won’t be any recession.

Inflation is expected to stay over the Fed’s target until at least 2026, said the report, and while the labour market remains strong, the bigger risk was that the rates would peak higher and later than expected. While some economists are expecting the fed funds rate to peak early next year at 4.75 per cent to five per cent, at least 24 of the 72 said that they believe it will go higher.

This comes amid signs of a slowing economy, particularly the housing market which was the epicentre of the 2008 recession in the US. Reportedly, home sales have decreased for nine months straight. Additionally, 27 of 45 economists who provided quarterly (GDP) forecasts estimate a contraction in economic growth for two consecutive quarters or more in the coming year. 

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