Behind Inflation and Recession Woes

Written By David Roberts

Posted June 15, 2022

Wall Street has been anticipating the Federal Reserve’s announcement today. The Fed has been holding a policy meeting since yesterday to discuss what the U.S. needs to do to combat inflation without resulting in anything catastrophic for the economy and the American people. Fed Chair Jerome Powell plans to have a press conference that will inform the public about the latest forecasts on GDP growth, inflation, and future interest rate hikes.

At the end of last week, the latest inflation data were released and indicated that the Fed might need to take a more aggressive approach since inflation continues to be a growing problem and concern. The latest report by the Bureau of Labor Statistics indicated that the annual rate of inflation was at a new 40-year high of 8.6% in May. This news had Wall Street and investors frantically selling off. 

According to CNN

The Dow (INDU) sank 876 points or 2.8%. The Nasdaq was down by 4.7% and has tumbled more than 10% in the past two trading sessions.

The broader S&P 500 fell 3.9%. That index is now more than 20% below its all-time high set in January, putting stocks in a bear market.

After what happened on Monday, you better believe that recession fears are becoming more and more prevalent. Vincent Reinhart, chief economist at Dreyfus and Mellon, said:

Recessions are mechanisms to purge excess, but there haven’t been a lot that have built up. If there is a downturn, we would be going into under more robust circumstances. But remember that healthy people can get sick, too.

Leading up to Powell’s announcement about how far the Fed will take interest rates, many are speculating that we are approaching a recession because of Monday’s bear market. However, the economy is in a different standing than it was during the last few recessions.

The U.S. has been as many as 48 recessions dating back to the Articles of Confederation. The most recent recession occurred from February 2020 to April 2020 as a result of the COVID-19 pandemic. And the last one before that had been more than a decade earlier. That was called the “Great Recession” and lasted from December 2007 to June 2009. 

While most are saying a recession is looming, there are a few strengths that our current economy has that could put off a recession — at least for the time being.

ConnectOne Bank CEO Frank Sorrentino said:

Unlike in 2008 and prior recessions, there is still a strong labor market. Folks are saying maybe this is not going to be so bad. And corporate balance sheets have never looked this good before prior recessions. 

Inflation is impacting Americans’ wallets from gas stations, grocery stores, airports, and restaurants. However, households have become better equipped to handle higher prices than they were before the pandemic. During the pandemic, a lot of households were able to still work and were able to save more since they weren't going out to restaurants, traveling, and spending their extra cash. Many Americans are somewhat financially stable after being able to save because of pandemic lockdowns and with stimulus payments and aid from the government. 

According to data from the Fed, it took only two quarters for Americans to climb above pre-pandemic levels compared with the 20 quarters (five years) it took for Americans to recover from the Great Recession. It’s going to take many more quarters of increasing inflation and a declining labor market to pull the U.S. economy significantly down. 

The U.S.'s unemployment is approaching the lowest rate in decades. The economy has regained almost 95% of the 22 million jobs that were lost during pandemic lockdowns. There are about two job openings for every available employee. Americans feel secure in the fact that will be able to find a job if they need to. Americans are quitting at a near-record rate — indicating that workers have confidence that they will be able to find new jobs that align with their needs.

Yes, we’re dealing with soaring inflation right now. But we are recovering from the COVID-19 pandemic and the increased demand that occurred when people got out of lockdowns. If a recession were to occur soon, it's possible that Americans will be in a better position than they were when the last few recessions occurred, and that is one optimistic outlook. With all that being said, we will still likely see Wall Street in a frenzy for the time being, especially with inflation rate hikes. However, those hikes are what's needed to reassure the economy. 

Until next time,

Jennifer Clark

Pro Trader Today