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We talk a lot about a recession. What should you believe?

In the spring of two years ago, the coronavirus pandemic plunged the US economy into recession. Last spring, the proliferation of vaccines tipped it into rapid expansion.

This spring, speculation abounds that another recession is imminent, perhaps at the end of this year or next year.

With official data due later this month, the US economy likely grew between 1% and 2% in the first three months of the year. But last year’s recovery produced a faster decline in unemployment and a larger rise in inflation than almost anyone expected. And balancing that might require a bitter remedy: higher interest rates.

“The debate over the need for faster interest rate hikes, and the related debate over whether that will push the economy into a recession, parallels, with a bit of a lag, the acceleration of inflation rate,” said VV Chari, an economist at the University of Minnesota.

Recession chatter dominated economists’ analysis of new inflation data released last week. Consumer prices rose 8.5% in March, likely the peak of a series of increases that began last April on the 2% range targeted by Federal Reserve policymakers.

But recession worries also arose in the days immediately following Russia’s invasion of Ukraine in February, with speculation focusing on the effect of tight energy and food supplies.

And with the balance of power in Congress on the line in the November election, political candidates — and the spin-docs and media around them — will handicap the possibility of a recession and point the finger at it for years. coming months.

Here is an overview of some of the key issues and influences in the recession debate:

What is a recession and how often does it happen?

Economies grow upwards most of the time. But they are sometimes interrupted by a slowdown, usually because excesses are happening and a reset is needed. Recession is defined as two or more consecutive three-month periods of decline.

Such downturns lead to painful changes for businesses, institutions and governments. More layoffs tend to happen. New goods, services and capital expenditures are delayed or cancelled. And even after recessions end, their effects persist as consumers and businesses remain risk averse.

Since the country began, there have been 19 recessions, the longest being the Great Depression of the 1930s and the shortest in 2020. Before the pandemic, the United States had its longest recession-free period since the first half of the 19th century.

Every time a recession hits, Minnesota’s economy will also fall. The state fared better – falling less and recovering faster – than the United States in the 2001 and 2008 recessions. However, it fell further than the United States in the 2020 recession, then recovered in line with the nation last year.

Why is there so much talk of inflation in conjunction with recession today?

Inflation, the upward pressure on prices, slows down an economy if it persists at a high rate for a relatively long period. Demand for goods and services is stifled by high prices, leading to lower production of goods and then job losses.

But inflation exceeded its target range just a year ago, not long enough to slow the economy. Instead, the question is whether it can be tamed without a recession, a feat called a “soft landing.” One of the only ways to control inflation is for central banks to raise interest rates, which slows economic activity by making it more expensive to borrow money.

Many central banks, including the US Federal Reserve, attempt to keep both inflation and unemployment low. This is difficult because inflation is reduced by raising rates, but unemployment is reduced by lowering rates.

While inflation is high right now, the country’s unemployment rate is low. At 3.6% last month, it was just a cut above where it was before the pandemic hit. This makes the environment conducive to rate hikes.

Most developed countries are experiencing similar conditions, and central bankers around the world are debating the pace of rate hikes. Last week, the central banks of Canada and New Zealand raised interest rates by half a percent.

The Fed raised its key rate by a quarter of a percent last month, its first upward move after taking the rate to zero during the pandemic. Many economists and investors expect a half-percent increase at its next meeting in early May.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, wrote in an essay after March’s rate hike that more data is needed to determine the speed and magnitude of rate hikes. “During this year…we will gain information to help us determine how far we may need to go,” he wrote.

Chari, who is also an adviser to the Minneapolis Fed, said he would monitor the release of minutes from the May meeting of the Fed’s open market committee responsible for setting rates. He expects some Fed officials to signal a desire for more aggressive hikes, perhaps a full percentage point in one move.

“If many are pushing for a more aggressive move, oddly enough this could lead us to a soft landing and inflation falling on its own,” Chari said. “It will have the effect of saying, ‘We are very serious about controlling inflation.'”

Was there a moment like this in the economic history of the United States?

Many people think back to the early 1980s, the last time the United States had inflation above 6%. But that was the end of a 10-year period in which inflation never fell below 5.8% and exceeded 10% for four of those years. The Fed pushed its key rate to 20% to calm inflation. This decision technically led to two recessions running from the beginning of 1980 to the end of 1982.

The situation that most closely resembles the current situation was in 1948. When the economy was booming during the recovery from World War II, inflation was around 8% and the Fed raised rates of interest. Historians and economists now consider that he moved too fast. A recession began late that year, the economy contracted in three of the four quarters of 1949, and unemployment soared to nearly 8%.

What are the arguments against higher interest rates leading to recession?

The first is that interest rates start from such a low base that, even if they increase by several percentage points, consumers and businesses can easily absorb them.

Another is that the most cost-sensitive assets – like houses and cars – are in such high demand and in short supply that it will take a long time for consumers to be turned away from them by higher interest rates. .

In February, new housing starts in the United States were at their highest level since mid-2006. There have only been around 5,000 homes for sale in the Twin Cities at any time this year, compared to 10,000 in 2020.

Auto dealers are still waiting for manufacturers to catch up after parts shortages hampered production last year. Stocks of car lots remain extremely low, although a handful of manufacturers are starting to announce financial promotions, a sign of a comeback.

Who is to blame if the recession comes?

If a recession does come in the next year, the reasons will be more numerous and complicated than just whether or not the Federal Reserve has succeeded in timing and pacing rate hikes.

America’s shrinking workforce is a drag on the economy, for example. The continued exit of baby boomers from the workplace, immigration restrictions that have emerged under the Trump administration, and lingering anxiety about COVID-19 have all reduced work participation – visible in the high numbers vacancies in Minnesota and elsewhere.

The war in Ukraine will remain a variable for months to come, although the oil and gas price spike that occurred in its early stages has receded.

Much of the debate in political circles centers on whether the U.S. bailout of the federal government, passed early last year and initially seen as the Biden administration’s early success, has proven to be be one too many recovery plans following the pandemic. The $1.9 trillion package followed more than $3 trillion in government assistance in 2020.

Chari sees another economic question waiting for an answer. Throughout the long period of expansion following the 2008-2009 recession, interest rates never returned to the 5-6% levels they had been in in the mid-2000s. And yet, throughout 2010s, inflation remained low.

This is a reversal of the long-held belief that when inflation threatens to rise, interest rates should be raised higher than the expected rate of inflation. “Has the way the economy works changed so fundamentally that the old rules no longer apply?” Charlie asked.

“Many policy makers buy into the idea that the world has changed,” he said. “A growing number of economists think, no, we’re going back to the way things were. What happens in the next two years will tell us who’s right.”