Causes of recession in the U.S. in 2022

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A recession is a brief period of decreased trade and manufacturing characterized by a decline in GDP over two consecutive quarters (Winters, 2022). The aftermath of the Covid-19 pandemic and the Ukraine-Russian war led to a slowdown in global economic growth (The World Bank, 2022). According to Louis (2022), the global economic prospects point out that the world is transiting to a protracted weak economy with soaring prices on essentials. Notably, the U.S. economy contracted on July 28, 2022, for the second consecutive quarter, right after the IMF predicted the likelihood of a global recession (Burga, 2022). In this regard, the U.S. economy might be entering into a recession. However, during a July 24 media briefing at the White House, Treasury Secretary Janet Yellen stated that the economy was only “in a period of transition” (Winters, 2022). She argued that the period of negative economic growth for two quarters was too fragmented to be classified as a recession. Consequently, various factors, such as ugly inflation rates, the decline in economic growth, increasing unemployment rates, and high-interest rates, point out the possibility of a recession in the U.S. in 2022.

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Ugly Inflation Rates

The future is uncertain despite economists’ assurance that a recession is not likely to occur in 2022. Winters (2022) asserts that unfavorable inflation figures increase the likelihood of a recession in 2022. Household income has declined while the rate of inflation is increasing steadily. Notably, the purchasing power, savings, and home values have declined. The Biden administration has been experiencing issues with the poor economic status that led to the implementation of fiscal policies to revive the economy.

Additionally, the U.S. budgets are being squeezed by rising costs on necessities such as food, energy, and housing, obscuring their economic growth. For example, the national average gas price increased gradually from 2.88 per gallon to 5.127 per gallon in just one year, representing a 78.02% increase from 2021 (Winters, 2022). Furthermore, the World Bank’s 2022 prospects show increased chances of a rapid economic and financial crisis if the global inflation rates continue soaring (World Bank, 2022). Although inflation has been tackled by applying fiscal and monetary policies, the prices of commodities might exceed the threshold of the measures instigated to tackle inflation. Therefore, a recession is highly probable.

The Decline in Economic Growth

The decline in economic growth can be linked to the aftermath of the Covid-19 pandemic and the recent Ukraine-Russian war. According to the World Bank prospects, economic growth in 2022 is expected to decelerate by 2.5%. Similarly, economic growth in 2022 is expected to decline to 3.4% from 6.6%, below the average value of 4.4% experienced in 2011-2019 (World Bank, 2022). These World Bank statistics signify a prospective global economic crisis, considering high inflation rates with a low consumer price index. Almost all economies in the world are experiencing a deceleration in economic growth, which can be accredited to an economic crisis (Torabi, 2022). Consequently, a deceleration in economic growth with high inflation rates is likely to increase the rate of the economic crisis across all major economies.

Increasing Unemployment Rates

A high unemployment rate is a product of low economic productivity. Reduced employment levels decrease purchasing power due to a decline in household income. In this regard, most households will be deprived of the ability to afford essential goods and services. In the U.S., some companies are already announcing layoffs as they struggle with the current economic headwinds, which include inflation, rising interest rates, and weakening consumer demand. According to Torabi’s (2022) report, startups made close to 37,000 layoffs in the second quarter of 2022. Notably, massive job losses have been experienced following the Covid-19 pandemic. Despite the Biden administration’s fiscal policy to replace the lost jobs, employment levels have not yet returned to the pre-pandemic levels. Consequently, low employment rates imply lower economic productivity that affects the trade of balances, leading to higher chances of a recession.

High-Interest Rates

A decline in interest rates promotes borrowing and spending during the early stages of a recession. However, high-interest rates result in higher borrowing costs that force people to start cutting back on spending, leading to a decline in demand for goods and services. According to Jain (2017), inflation decreases with the decline in demand for goods and services. Notably, the U.S. applied various strategies to curb inflation. For instance, the Federal Reserve increased its benchmark interest rate in August by 225 basis points overnight, bringing this year’s target range of 2.25% to 2.50% (Cox, 2022). In addition, the Fed increased interest rates to 19% while inflation was 14%. This curbed the nation’s spiraling inflation even though it led to a severe recession (Cox, 2022).

Furthermore, the Federal Reserve has been raising interest rates to combat the rising inflation in 2022 through its monetary policy. In essence, there are increased chances that most sectors that rely on borrowing might close if the interest rates continue rising. Thus, the closure of such industries will shrink economic productivity and create an economic crisis.

Conclusion

There are increased concerns that the U.S. economy may be approaching a recession. Depressing inflation figures lower incomes and salaries while degrading savings, purchasing power, and home values. Inflation also lowers purchasing power and the level of savings. In addition, America’s rising unemployment rates will lead to a decline in economic productivity, affecting the trade of balances. High-interest rates are likely to lead to reduced borrowing that might cause economic degradation and the closure of industries. Consequently, the detrimental effects of the Covid-19 pandemic and the recent war in Ukraine led to economic deceleration, increasing the risk of recession in the U.S.

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  1. Burga S. (2022). What a Recession Actually Is—And How to Know If the U.S. Is Entering One. Retrieved 16 August 2022, from https://time.com/6201205/what-is-a-recession-2022/
  2. Cox J. (2022). Fed hikes interest rates by 0.75 percentage point for second consecutive time to fight inflation. CNBC. Retrieved 19 August 2022, from https://www.cnbc.com/2022/07/27/fed-decision-july-2022-.html.
  3. Jain, D. E. (2017). Inflation and Recession Cycle: Impacts over Global Economies and Markets. Iosr Journal of Economics and Finance, 8(2), 1-5.
  4. Louis, L., Frankel, A., Ayub, A., Williamson, T., Hanes, A., & Evans, M. L. (2022). Reproductive Health and Coronavirus Disease 2019–Induced Economic Contracture: Lessons From the Great Recession. Clinical Therapeutics, 44(6), 914-921.
  5. The World Bank, (2022). Stagflation Risk Rises Amid Sharp Slowdown in Growth. The World
  6. Bank Group. Retrieved 6 September 2022, from https://www.worldbank.org/en/news/press-release/2022/06/07/stagflation-risk-rises-amid-sharp-slowdown-in-growth-energy-markets
  7. Torabi F. (2022). Are We in a Recession? Here’s What You Should Know About Layoffs, Debt and Investing. Retrieved 18 August 2022, from https://www.cnet.com/personal-finance/banking/are-we-in-a-recession-heres-what-you-should-know-about-layoffs-debt-and-investing/
  8. Winters M. (2022). ‘Ugly’ inflation numbers make a recession more likely in 2022, economist says. Retrieved 17 August 2022, from https://www.cnbc.com/2022/07/20/economists-chance-of-a-2022-recession-is-rising-with-inflation.html#:~:text=Spend-,’Ugly’%20inflation%20numbers%20make%20a%20recession%20more,likely%20in%202022%2C%20economist%20says&text=US%20Federal%20Reserve%20Chair%20Jerome,DC%2C%20June%2015%2C%202022.
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