Why are some economists predicting a recession later this year?


Joshua D Picazo

Unemployment remains low however inflation is still high. The Federal Reserve’s plan to fight inflation as well as bank failures has led many economists to predict a recession.

Following recent reports that staff economists at the Federal Reserve are predicting a recession later this year, The Skyline View spoke with Skyline College economics professor Masao Suzuki to learn more about the causes, predictions and what this means for the average person.


The Skyline View:  How closely related are the federal reserves interest rates hikes and the expected recession?

Professor Masao Suzuki: Higher interest rates are a factor in the slowing economy.  This can be most clearly seen in the housing sector, where higher interest rates cause mortgage payments to rise, leading to fewer purchases.  Indeed, housing sales have been falling for months.  But the fact that inflation is outpacing wage increases, means that the purchasing power of households is also falling, which is contributing to falling retail sales, which will also slow the economy.  Corporate profits have been falling when adjusted for inflation, which is leading to less spending on new plants and equipment, which also slows the economy.

TSV: Do you think the interest rate hikes softened inflation?

Suzuki: I think that again, the higher interest rates have softened inflation.  But inflation was also caused by shortages on the supply side, from chips for new cars to oil with the US sanctions on Russia, to worker shortages made worse by a big drop in immigration.  These are also easing, contributing to lower inflation.  Most people have basically spent what they might have saved during the pandemic, which also slows the economy and puts downward pressure on the economy.

TSV: If a recession does occur, what does this mean in real terms for the average person?

Suzuki: While economists agree that a recession is very likely, most think that it will be mild.  However, I am with a minority that think that the recession will be quite bad.  In a typical recession, that is one without a financial crisis or a pandemic (like the ten recessions between World War II and the 2008 financial crisis), the Federal Reserve cuts interest rates.  For example in 2001, the Fed cut interest rates eleven times that year, lowering the interest rate from 6.5% to start the year, to 1.75% at the end.  However given that core inflation (inflation without food and energy) is not falling from its 5.5% rate, I think that the Fed will not aggressively lower interest rates.  Thus we could have a long and deep recession like 1981, which went from July of 1981 to November 1982 and unemployment went over 10%.  Further, usually, the Federal government cuts taxes or increases spending.  However, with Republicans in control of the House, and that they want to cut government spending outside of the military, social security, and Medicare by up to 80%, I don’t see this happening either.

TSV: Is there anything else you’d like to add?

Suzuki: If there is only a short and mild recession, the unemployment could climb by one percentage point to 4.5% (which is what the Fed is projecting).  This would put about 1.5 million people out of work which would be hard on them, but less so for others.  But a really bad recession, with unemployment rising by 6 or even 7 percent (to 9.5% or 10.5%), would nearly ten million people out of work.  Hard-hit communities, cities, counties, and states would lose tax revenue, and then cut spending even more, hurting schools, transportation, and services.  This would be quite difficult for many people.