Page 11 - aruba-today-20220615

A11
BUSINESS Wednesday 15 June 2022
EXPLAINER: Recession fears grow. Just how high is the risk?

By CHRISTOPHER RUGABER arrive after the yield curve
WASHINGTON (AP) — In- inverts.
flation is at a 40-year high. A short-lived inversion oc-
Stock prices are sinking. The curred Tuesday, when the
Federal Reserve is making yield on the two-year Trea-
borrowing much costlier. sury briefly fell below the
And the economy actu- 10-year yield as it did tem-
ally shrank in the first three porarily in April. Many ana-
months of this year. lysts say, though, that com-
Is the United States at risk paring the 3-month yield
of enduring another re- to the 10-year has a better
cession, just two years af- recession-forecasting track
ter emerging from the last record. Those rates are not
one? inverting now.
For now, most economists Powell has said the Fed's
don't foresee a downturn goal was to raise rates to
in the near future. Despite cool borrowing and spend-
the inflation squeeze, con- ing so that companies
sumers — the primary driv- would reduce their huge
er of the economy — are number of job openings. In
still spending at a healthy turn, Powell hopes, compa-
pace. Businesses are invest- nies won't have to raise pay
ing in equipment and soft- In this Tuesday, June 15, 2021 photograph, beef is displayed in the meat department at Lambert's as much, thereby easing
ware, reflecting a positive Rainbow Market, in Westwood, Mass. inflation pressures, but with-
outlook. And the job mar- Associated Press out significant job losses or
ket is still booming, with hir- an outright recession.
ing strong, layoffs low and ness loans, by as much as kets, for cars, appliances hinder consumer spending. "I do expect that this will be
many employers eager for three-quarter of a percent- and furniture, for example. — Eventually, the slow- very challenging," Powell
more workers. age point. That would be — Borrowing costs for busi- down would feed on itself, said. 'It's not going to be
"Nothing in the U.S. data the Fed's largest rate hike nesses are rising, as reflect- with layoffs mounting as easy."
is currently suggesting a since 1994, and it could ed in increased yields on economic growth slowed, Though economists say it's
recession is imminent," Ru- herald the start of a period corporate bonds. At some leading consumers to in- possible for the Fed to suc-
beela Farooqi, chief U.S. of especially aggressive point, those higher rates creasingly cut back out ceed, most now also say
economist at High Frequen- credit tightening by the could weaken business of concern that they, too, they're skeptical that the
cy Economics, wrote Tues- central bank — and with it, investment. If companies might lose their jobs. central bank can tame
day. "Job growth remains a higher risk of recession. pull back on buying new The clearest sign that a re- such high inflation without
strong and households are Analysts say the U.S. econ- equipment or expanding cession might be nearing, eventually derailing the
still spending. omy, which has thrived for capacity, they will also start economists say, would be a economy.
That said, Farooqi cau- years on the fuel of ultra- to slow hiring. steady rise in job losses and Deutsche Bank economists
tioned, "the economy fac- low borrowing costs, might — Falling stock prices may a surge in unemployment. think the Fed will have to
es headwinds." not be able to withstand discourage affluent house- As a rule of thumb, an in- raise its key rate to at least
Among the signs that reces- the impact of much higher holds, who collectively hold crease in the unemploy- 3.6% by mid-2023, enough
sion risks are rising: High in- rates. the bulk of America's stock ment rate of three-tenths to cause a recession by the
flation has proved far more The nation's unemployment wealth, from spending as of a percentage point, on end of that year.
entrenched and persistent rate is at a near-half-cen- much on vacation travel, average over the previous Still, many economists say
than many economists — tury low of 3.6%, and em- home renovations or new three months, has meant any recession would likely
and the Fed — had expect- ployers are posting a near appliances. Broad stock that a recession will even- be mild. American fami-
ed: Consumer prices rose record number of open indexes have tumbled for tually follow. lies are in much better fi-
8.6% last month from a year jobs. So what might cause five straight weeks. Falling Many economists also nancial shape than they
earlier, the biggest annual an economy with such a share prices also tend to di- monitor changes in the in- were before the extended
12-month jump since 1981. healthy labor market to suf- minish the ability of corpo- terest payments, or yields, 2008-2009 Great Recession,
Russia's invasion of Ukraine fer a recession? rations to expand. on different bonds for a when plunging home prices
has exacerbated global Here's what the path to an — Rising caution among recession signal known as and lost jobs ruined many
food and energy prices. Ex- eventual downturn could companies and consum- an "inverted yield curve." households' finances.q
treme lockdowns in China look like: ers about spending freely This occurs when the yield
over COVID-19 worsened — The Fed's rate hikes are could further slow hiring or on the 10-year Treasury ARUBA
supply shortages. sure to slow spending in ar- even lead to layoffs. If the falls below the yield on a
Fed Chair Jerome Powell eas that require consumers economy were to lose jobs short-term Treasury, such CLEAN
has vowed to do what- to borrow, with housing the and the public were to as the 3-month T-bill. That
ever it might take to curb most visible example. The grow more fearful, consum- is unusual, because longer-
inflation, including raising average rate on 30-year ers would pull back further term bonds typically pay
interest rates so high as fixed mortgages topped on spending. investors a richer yield in
to weaken the economy. 5% in April for the first time in — The consequences of exchange for tying up their
If that happens, the Fed a decade and has stayed high inflation would wors- money for a longer period.
could potentially trigger a there since. A year ago, en this scenario. Wage Inverted yield curves gen-
recession, perhaps in the the average was below 3%. growth, adjusted for infla- erally mean that investors
second half of next year, Home sales have fallen tion, would slow and leave foresee a recession and
economists say. in response. And so have Americans with even less will compel the Fed to slash
On Wednesday, the Fed is mortgage applications, purchasing power. Though rates. Inverted curves often
set to raise its benchmark a sign that sales will keep a weaker economy would predate recessions. Still, it IS MORE
interest rate, which affects slowing. A similar trend eventually reduce inflation, can take as long as 18 or 24 DUSHI
many consumer and busi- could occur in other mar- until then high prices could months for the downturn to