Work in Progress
Is the U.S. destined to have a recession in 2022?
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The American economy isn’t looking great right now. U.S. GDP shrank last quarter, despite a hearty showing from American consumers. Inflation is high; markets are down; both wages and personal-savings rates show some troubling statistical signals. Is the U.S. destined to have a recession in 2022? I don’t know for sure. But here are nine signs that worry me.
1. Everybody’s stock portfolio is disgusting right now. The Nasdaq is down 30 percent. Growth stocks and pandemic darlings such as Peloton and Zoom have crashed more than twice that amount. Hedge funds that backed these growth stocks, including Ark and Tiger Global, have been crushed. If you look at your 401(k), you’ll see that … no, scratch that, you should under no circ*mstances look at your 401(k).
“The stock market is not the economy” is a thing that some people like to say. But it’s not a very useful mode of analysis. Health care isn’t the economy either, and neither is the gross metropolitan product of Los Angeles. But if either of those things crashed by 30 percent in a quarter, we would all agree that was important. Sharp declines in equity values can trickle down through the economy in all sorts of ways, discouraging investment and spending, or leading to a contagion of layoffs.
2. The crypto bubble has popped. Crypto fans had a fun ride, powered by exuberant risk taking in an era of low interest rates. But now the car is coming down the other side of the roller coaster. As fear and interest rates spike, investors are selling off their positions and billions of dollars of value are being erased from the industry. By one estimate, more than $200 billion of stock-market wealth has been destroyed within crypto alone, in just a matter of days. The bursting of the crypto bubble seems quite reminiscent of the dot-com bubble of 2000, when the Nasdaq crashed and the effects reverberated throughout the economy, wiping out retail investors and pulling down business investment until we ended up in a brief recession. If the crypto bubble popping were the only thing happening right now, I don’t think a recession would be likely. Except it’s not even close to the only (or even the most important) thing happening right now.
3. Inflation is very high and broad-based, and that’s bad. This week’s inflation headlines were a bit confusing. The Wall Street Journal reported that inflation had “eased.” The New York Times reported that prices are “rising rapidly,” at a pace close to a 40-year record. Who’s right? They both are. The rate of price increases is declining, but the level of price increases is still extremely high and frustratingly broad-based. Several months ago, some economists offered succor to worried consumers by pointing out that inflation was overwhelmingly about a handful of weird categories, such as used cars. Well, that’s no longer true. Today used-car prices are actually declining as inflation has moved on to service industries, such as restaurants and tourism. This week, gas prices hit their highest average nominal price ever. Inflation is bad for all sorts of reasons. People really hate it: The University of Michigan’s Index of Consumer Sentiment is near its 60-year low.
4. A lot of people feel poorer than they did one year ago. Unemployment is very low, and the labor market is tight, which means workers can easily quit jobs and take new positions to make more money. (This trend is sometimes confusingly referred to as the “Great Resignation.”) That’s a nice situation. But inflation is rising every month, and raises rarely come more than once a year. That means “real,” or inflation-adjusted, wages are actually declining. Worse, according to the Atlanta Federal Reserve, wage growth is starting to level off, even as inflation continues to march on. This isn’t a tenable situation.
5. Savings are falling, and debt is rising. From 2020 to 2021, the U.S. government sent most American households several thousand dollars in checks to get them through the pandemic. With much of the economy shut down, many Americans held on to that stimulus cash, and the personal-savings rate soared to a 60-year record. But now Americans have spent just about all that cash, and the personal-savings rate has fallen to below its 2010s average. During an unstable moment for the economy—with markets collapsing, and inflation rising, and the Federal Reserve slamming the brakes on the economy—the typical household doesn’t have much in the way of protection. Instead consumer debt is breaking new record highs.
6. The Federal Reserve’s interest-rate hikes are already causing mayhem. One of the Federal Reserve’s mandates is to keep inflation around 2 percent. Well, so much for that one. Inflation has skyrocketed past 8 percent, leading the Fed to announce a spree of rate hikes designed to slow down economic activity. In theory, the plan works like this: The Federal Reserve raises interest rates, which makes it more expensive to borrow money for mortgages, cars, and business investments. As a result, investment in all those categories and more declines, and the economy cools off. But here’s the problem. Modern history has very few examples of unemployment this low and inflation this high where rate increases haven’t caused a recession. On the path to crushing inflation, the Fed may destroy trillions of dollars of wealth and economic activity.
7. China is a mess. The world’s second-largest economy has had a strange 2022. China’s zero-COVID policies have led to shocking lockdowns in major cities such as Shanghai, freezing economic activity. China is also dealing with a real-estate-investment implosion, falling business confidence, and startling declines in economic activity. Why is this troubling for the U.S.? Because China was projected to account for about one-quarter of global economic growth in the next few years. When China sneezes—or, more apt, when Chinese officials forcibly quarantine anybody who sneezes—the world could catch a cold. The U.S. might have been in a strong position to deal with a Chinese slowdown if its other trading partners were all doing well. But they’re not.
8. A recession is coming for Europe. The U.K. economy is shrinking, and the central bank says inflation will exceed 10 percent this year. War in Ukraine has sent energy prices skyrocketing throughout Europe, and most economists believe that the continent’s economy will contract this year. Europe seems very likely headed toward both stagnation and inflation—the dreaded combination that, 50 years ago, gave birth to the awful term stagflation. If Europe shrinks while Chinese growth decelerates, American exporters will have a hard time contributing to growing GDP.
9. Oh yeah, it’s still a pandemic. Restaurant activity and airline travel are nearly back to their pre-pandemic highs as most Americans return to something like “normal.” But we don’t know what else the virus and its variants are going to throw at us. Could the next variant be more transmissible and more deadly, and also get around our immunity? I hope not. But these are the 2020s. Anything is possible.
Derek Thompson is a staff writer at The Atlantic and the author of the Work in Progress newsletter.
