Analysts fear that the potential recession in 2022 is looking like the most unique one the world has ever seen. Notably, the US plays a major role in this process. Economists note several factors that signal the US economic downturn. In Q2 and Q3 of 2022, the country’s GDP has been shrinking. Homebuilding activity has plummeted and consumer confidence is at its lowest point since the beginning of the pandemic. Experts highlight three significant reasons why the upcoming recession may be different.
1. Robust labor market
When a recession hits a country, economic output and employment decline simultaneously. Thus, higher unemployment leads to lower consumer spending which creates a vicious cycle. However, the current unemployment rate is at a record low of 3.6% last seen 50 years ago. A robust job market is “historically unusual” during a recession, according to economists at Goldman Sachs.
2. Cash-rich companies
Companies usually post declines in sales and earnings during recessions. However, the principle does not work this time. Collectively, US corporations are gaining large profits and have over $4 trillion in cash. Currently, the average US corporation has an after-tax profit margin of 16%. During recessions, this value drops to single digits but it is quite high now. Analysts say that companies may have raised these funds during the era of easy money and low-interest rates. Now, this cash is acting as a buffer and could allow companies to keep their workforce and savings despite the economic slowdown.
3. Fed raises rates
The Fed’s hawkish stance is another unusual factor. During the history of recessions, the regulator cut interest rates and added more money to the economy to make it more stable. However, the Fed has been raising rates to curb inflation in 2022. Economists share an opinion that the central bank is likely to stick to its hawkish policy in the future. Many analysts note that these factors are highly unusual for a recessionary environment. The Wall Street Journal pinpoints two possible scenarios: the economy may either recover swiftly, ending the recession, or it may keep nosediving, forcing employers to cut jobs. These two scenarios could potentially be the “soft landing” and “hard landing.” The first scenario suggests that investors should prepare for a slowdown in the economy and plummeting tech stocks. The second option implies that market players may move their capital into safe-haven assets. According to Goldman Sachs estimates, Europe has a 60% chance to experience a severe downturn. The probability of a recession in the US is twice as low and stands at 30%. The UK may drop into a recession with a probability of 35%. At the moment, the energy crunch in Europe is threatening to plunge the region into a recession. At the same time, commodity prices are pushing inflation higher and increasing the risk of a recession in the country, analysts conclude.
