Is there a risk that the economy will enter a recession soon? This is what you should know

By Christopher Rugaber Associated Press

Inflation is at its highest level in the last 40 years.

Stock prices sink.

The Federal Reserve (Fed) makes loans more expensive this Wednesday (to buy a house, for credit cards, etc.).

And the economy has contracted in the first three months of this year.

Is the United States at risk of another recession, just two years after emerging from the last one?

Most economists do not currently foresee a recession in the near future.

Despite inflationary pressure, consumers - the main engine of the economy - continue to spend at a good pace.

Companies are investing in equipment and

, reflecting a positive outlook.

And the job market is still booming, with strong hiring data, few layoffs and many employers eager to find more workers.

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"Nothing in the US data currently suggests that a recession is imminent," Rubeela Farooqi, an economist at High Frequency Economics, explained in a note on Tuesday.

"Job growth remains strong and households continue to spend," she said.

But he warned that "the economy is facing a headwind."

And the signs that indicate a risk of recession increased:

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Analysts say the US economy, which has thrived for years on ultra-low-priced borrowing, may not be able to withstand the impact of much higher rates than ever before.

The country's unemployment is at 3.6%, the lowest level in nearly 50 years, and the job market is awash with a near-record number of job openings.

But even an economy with a healthy job market can end up in a recession if borrowing becomes more expensive and consumers and businesses rein in spending.

How does raising rates weaken the economy?

Rising interest rates on loans are sure to curb spending in sectors where consumers typically borrow.

Housing is the most visible example.

The median rate on 30-year fixed mortgages topped 5% in April for the first time in a decade and has stayed there ever since.

A year ago, the average was below 3%.

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Consequently, home sales have fallen, as have mortgage applications, a sign that sales will continue to slow.

A similar trend could occur in other markets, such as automobiles, household appliances and furniture, for example.

How will spending be affected?

Borrowing costs for businesses are rising, as reflected in rising corporate bond yields.

At some point, those higher rates could weaken business investment.

If companies slow down on buying new equipment or on expanding capacity, they will also start slowing down on hiring.

Increased caution among businesses and consumers about free spending could further curb hiring or even lead to layoffs.

If the economy lost jobs and citizens became more fearful, consumers would cut spending even more.

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Falling stock prices may discourage affluent households, who collectively own most of America's stock market wealth, from spending as much on vacations, home improvement or new appliances.

Broad stock indices have been falling for weeks.

The loss of share value also tends to reduce the ability of companies to expand.

Wage growth, adjusted for inflation, would slow, leaving Americans with even less purchasing power.

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Although a weaker economy would eventually reduce inflation, until then high prices could make it difficult for consumers to spend.

Over time, the slowdown would feed on itself, with layoffs rising as economic growth slowed, prompting consumers to increasingly cut back on their own spending fearing they, too, might lose out. their works.

What signs are there of an impending recession?

According to economists, the clearest sign that a recession is coming is a steady rise in job losses and rising unemployment.

As a general rule, when unemployment has advanced 0.3% on average during the previous three months, that has meant that the economy has ended up entering a recession.

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Is there any other sign to pay attention to?

Many economists also watch changes in interest payments, or yields, on different bonds as a sign of recession known as an inverted yield curve.

This occurs when the yield on the 10-year bond falls below the yield on a short-term bond, such as a 3-month Treasury bill.

This is unusual, because long-term bonds typically pay investors a higher yield in exchange for tying up their money for a longer period.

Inverted yield curves often mean that investors anticipate a recession and force the Federal Reserve to lower rates.

Inverted curves tend to predate recessions.

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However, the recession may take up to 18 or 24 months to arrive after the yield curve inverts.

A short-lived reversal occurred on Tuesday, when the 2-year bond yield briefly fell below the 10-year yield, as it did temporarily in April.

However, many analysts claim that comparing the 3-month yield to the 10-year yield has a better recession-forecasting track record.

Those rates are not being reversed for now.

The Fed chairman said his goal was to raise rates to cool borrowing and spending so that companies cut back on their huge number of job postings.

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In turn, Powell hopes that companies will not have to raise wages as much, thus alleviating inflationary pressures, but without significant job losses or a recession.

While economists say the Fed is likely to hit its target, most now also say they are skeptical the central bank can tame such high inflation without ultimately derailing the economy.

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Deutsche Bank economists believe the Fed will have to raise its key interest rate to at least 3.6% by mid-2023, enough to trigger a recession by the end of that year.

However, many economists say any recession would likely be mild.

Families in the US are in much better shape financially than they were before the Great Recession of 2008-2009, when plummeting home prices and job losses wrecked the finances of many.