President Biden is desperate to calm recession fears, especially as midterm elections approach.

The president and administration officials have been hitting the news show circuit denying that a recession is inevitable. But their efforts are futile.  

Inflation, which is tracking at a 40-year high, is the top-of-mind issue for Americans. Rising prices on just about every household item are double or higher than they were a year ago. Americans do not buy the scapegoating of Putin, price-gouging, or profiteering as the causes of inflation and do not trust the president’s handling of the economy.

More worrisome, fears are rising that a recession is right around the corner because of inflation. There are many good reasons to think so.

Here’s the truth: A recession is inevitable

“Recessions always arrive” as Politico explains. It’s part of the economic cycle. We’ve had a decade-long economic expansion following the Great Recession that likely would have continued had it not been for the pandemic. The boom wouldn’t have lasted forever though. 

Former Obama Treasury Secretary Larry Summers said this week:

I think a recession is almost inevitable, probably a 75%, 80% chance within the next two years, and there’s certainly a real risk that it will come sooner. 

Summers’s warning back in February of 2021 that Biden’s $1.9 trillion American Rescue Plan, if passed, would fuel a surge in inflation was correct. Washington would be wise to listen to him this time.

Summers joins many economists who believe that inflation, coupled with rising interests will lead the economy to retract. A recent survey of 49 U.S. economists conducted at the beginning of June by the Financial Times and the Initiative on Global Markets at the University of Chicago, finds that nearly 70 percent of them predict the U.S. will go into recession next year.

The Federal Reserve Bank of Atlanta is a bit more measured predicting that the economy will not have zero growth in the second quarter of 2022. If the economy shrinks instead, by definition, we will be in a recession.

Whether this year or next, it is inevitable that our economy recedes. The question is how deep it will be and how long it will last.

Americans have soured on the economy

For yet another month, the closely-watched consumer sentiment economic indicator is signaling trouble ahead for our economy. According to the University of Michigan’s Surveys of Consumers, the index of consumer sentiment hit a record low in June for the series, which spans back to the mid-1970s. Inflation is the key driver eroding consumer sentiment.

With no end in sight, Americans are altering their lives to adjust to the blow that rising prices are dealing their budgets. The rippling impacts of millions of families pulling back on their consumption habits will inevitably be to slow down the economy.

Here are 3 ways that Americans are responding to inflation:

  1. Pumping Less Gas and Taking Fewer Trips. Arie Kotler, president and CEO of Arko Corp, which operates nearly 1,400 convenience stores–most with gas stations–in smaller towns and rural communities in 28 states, noted: “Compared to the same time last year, people are coming more frequently to the pump but instead of fully filling up the tank, they’re filling half or quarter tank at a time. They’re driving less and shorter distances.”
  2. Sitting out the Housing Market. The Federal Reserve Bank raised interest rates three-quarters of a point which spiked borrowing costs for homes. As a result, housing demand is falling and the pace of home price growth is slowing.

    Fed Chair Jerome Powell said during a congressional hearing this week:
    “Many, many indicators suggest that fewer people are visiting homes, the wait time for selling a home is increasing, housing sales are moving down, housing starts are moving down, and overall it’s a slowing in the housing market. Many forecasts call for the increase in housing prices to slow pretty significantly now.”
  3. Ending their shopping sprees. The Washington Post reports on spending data for goods and services:
    “Retail sales slowed last month for the first time this year, driven by a 4 percent drop in car sales. U.S. flight bookings dipped 2.3 percent in May from a month earlier, according to data from Adobe Analytics. And both high- and low-income Americans have begun pulling back, particularly on services, in the past four to six weeks, according to an analysis of credit card data by Barclays.”

Bottom Line

A recession is a real, likely, and painful consequence of measures meant to slow 40-year-high inflation. We only hope that the historic number of unfilled jobs will serve as a cushion against mass job losses and economic hardship.

In the meantime, Washington should not hamper inflation-fighting efforts by the Fed by passing trillions more in federal spending.