Page 11 - aruba-today-20220510

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business Tuesday 10 May 2022

EXPLAINER: Recession fears grow. But how high is the risk?

By CHRISTOPHER RUGABER rations to expand.
AP Economics Writer — Rising caution among
WASHINGTON (AP) — In- companies and consum-
flation is at a 40-year high. ers about spending freely
Stock prices are sinking. The could further slow hiring or
Federal Reserve is making even lead to layoffs. If the
borrowing much costlier. economy were to lose jobs
And the economy actu- and the public were to
ally shrank in the first three grow more fearful, consum-
months of this year. ers would pull back further
Is the United States at risk on spending.
of enduring another re- — The consequences of
cession, just two years af- high inflation would wors-
ter emerging from the last en this scenario. Wage
one? growth, adjusted for infla-
For now, even the more tion, would slow and leave
pessimistic economists Americans with even less
don't expect a downturn purchasing power. Though
anytime soon. Despite the Photo of Andrew Jackson on a $20 bill is shown, Jan. 28, 2022, in Cleveland. a weaker economy would
inflation squeeze, consum- Associated Press eventually reduce inflation,
ers — the primary driver until then high prices could
of the economy — are week, he reinforced the Bank of America, said in a will keep slowing. A similar hinder consumer spending.
still spending at a healthy central bank's determina- note to clients. trend could occur in other — Eventually, the slow-
pace. Businesses are in- tion to do whatever it might The nation's unemploy- markets, for cars, appli- down would feed on itself,
vesting in equipment and take to curb inflation, in- ment rate is at a near-half- ances and furniture, for ex- with layoffs mounting as
software, reflecting a posi- cluding raising interest rates century low of 3.6%, and ample. economic growth slowed,
tive outlook. And the job so high as to weaken the employers are posting a re- — Borrowing costs for busi- leading consumers to in-
market is more robust than economy. If that happens, cord-high number of open nesses are rising, as reflect- creasingly cut back out
it's been in years, with hiring the Fed could potentially jobs. So what might cause ed in increased yields on of concern that they, too,
strong, layoffs way down trigger a recession, per- an economy with such a corporate bonds. At some might lose their jobs.
and many employers des- haps in the second half of healthy labor market to suf- point, those higher rates The clearest sign that a re-
perate for more workers. next year, economists say. fer a recession? could weaken business cession might be nearing,
Yet several worrisome By mid-2023, the Fed's Here's what the path to an investment. If companies economists say, would be a
developments in recent benchmark short-term rate, eventual downturn could pull back on buying new steady rise in job losses and
weeks suggest that the risk which affects many con- look like: equipment or expanding a surge in unemployment.
of recession may be rising. sumer and business loans, — The Fed's rate hikes are capacity, they will also start As a rule of thumb, an in-
High inflation has proved could reach levels not seen sure to slow spending in ar- to slow hiring. crease in the unemploy-
far more stubborn than in 15 years. Analysts say eas that require consum- — Falling stock prices may ment rate of three-tenths
many economists had ex- the U.S. economy, which ers to borrow, with housing discourage affluent house- of a percentage point, on
pected. Russia's invasion of has thrived for years on the the most visible example. holds, who collectively hold average over the previous
Ukraine has exacerbated fuel of ultra-low borrowing The average rate on a 30- the bulk of America's stock three months, has meant a
global food and energy costs, might not be able year fixed mortgage has wealth, from spending as recession will eventually fol-
prices. Extreme lockdowns to withstand the impact of already jumped to 5.25%, much on vacation travel, low.
in China over COVID-19 much higher rates. the highest level since 2009. home renovations or new Many economists also
are worsening supply short- "Recession risks are low now A year ago, the average appliances. Broad stock monitor changes in the in-
ages. but elevated in 2023 as in- was below 3%. Home sales indexes have tumbled for terest payments, or yields,
And when Federal Reserve flation could force the Fed have fallen in response, five straight weeks. Falling on different bonds for a re-
Chair Jerome Powell spoke to hike until it hurts," Ethan and so have mortgage ap- share prices also tend to di- cession signal known as an
at a news conference last Harris, global economist at plications, a sign that sales minish the ability of corpo- "inverted yield curve." q