Is the United States heading into a recession? Here’s what you need to know | Robert Reich

TheAfter Friday, the US Bureau of Labor Statistics released its CPI report for May, which showed inflation was getting worse. On Wednesday, the Federal Reserve responded by raising interest rates by three-quarters of a point. But the bigger story and the biggest concern is not inflation. It’s the obvious possibility of a recession. Or maybe both (so-called “stagflation.”) Here are some frequently asked questions:

1. Is the United States heading into a recession? Several signs point in this direction. New home construction slowed in April. Mortgage demand continues to decline. Some of the country’s largest and most influential retailers have reported disappointing sales and profits. The stock market is in bearish territory. Futures markets indicate problems in the future.

2. What exactly is stagnation? “Recession is a technical term, defined in the United States as two consecutive quarters of GDP contraction. In practical terms, recessions mean fewer jobs and lower wages.

3. When is a recession likely – and should I panic? Don’t panic! If it does, it won’t happen right away. I think some time over the next six months. It’s a possibility that you should be aware of.

4. Who gets hurt most from a recession? Low-income Americans are particularly vulnerable Because they tend to be the first to be fired when the economy slows (and the last to be fired when it rebounds). Recessions have also hurt young people trying to gain a foothold in the job market. And it can be tough for retirees whose IRAs or 401(k)s are battered.

5. Why are we heading into a recession? This is partly due to continuing uncertainty from the coronavirus pandemic and Russia’s invasion of Ukraine. but the Main The reason in the US is the rate hike by the Federal Reserve.

The Fed’s rate increase of 0.75 percentage points on Wednesday was Largest single rate increase since 1994.

6. What is the relationship between rising Fed rates and a recession? Higher interest rates increase borrowing costs for individuals and consumers – causing them to reduce purchases of everything, including homes. This, in turn, leads to a slowdown in the economy.

7. Raise Federal Interest Rates Always lead to recession? no. It is possible for the US to have a “soft landing” that lowers inflation without causing a recession. But rate hikes by the Fed are often exaggerated, leading to a recession – especially when you’re on the scale the Fed has in mind. In 1981, for example, the Fed under Paul Volcker raised interest rates too high (to reverse double-digit inflation), plunging the economy into a deep recession.

8. Why Is the Federal Reserve doing this now? Because she believes he must slow the economy in order to slow down inflation, which has reached a 40-year high.

9. Is the Federal Reserve right? A slowing economy will reduce inflationary pressures somewhat, but the Fed operates according to an old model of the economy – when inflation was largely driven by higher wages. The way to slow inflation then was to undo wage increases by reducing employment. Essentially, the Fed enlisted a certain number of workers in the fight against inflation by pulling them out of the labor force. That was when American workers had strong unions and it was difficult for companies to increase their capacity by outsourcing abroad.

These terms no longer apply. Workers now have very little bargaining power compared to what they had thirty or forty years ago. Just look at the data: even though wages are rising, they are not rising as fast as prices.

10. But if raising interest rates is going to reduce inflationary pressures somewhat, why shouldn’t the Fed at least try? Because raising interest rates as much as the Fed seems likely to do will do more harm than good. Existing inflationary forces are spreading across the globe – coming from pent-up global demand in the wake of the worst of the pandemic, along with worldwide supply shortages, exacerbated by Putin’s war.

Inflation in the US is not as bad as it is in most other advanced economies. The slowdown in the US economy may make an impact on these forces, but not a significant one. However, the cost – in terms of recession or near recession, job losses and wages – is likely to be huge.

11. Are there unique factors driving inflation in the United States? yes. One of the largest of these comes from highly profitable companies with significant market power, which use inflation as a cover to raise their prices.

Oil and gas giants, for example, are reaping record profits. In the first quarter of 2022, Chevron’s profit more than quadrupled from the first quarter of 2021, and ExxonMobil’s profit doubled despite it taking a $3.4 billion hit from leaving its Russia business. ExxonMobil will not use its higher dividend to ease the burden on consumers at the gas pump, but to increase its share buybacks. The oil giant is now planning to buy back $30 billion of its stock, up from the $10 billion it announced earlier this year. Note: A rate hike by the Fed will not prevent this rate manipulation.

12. What will stop them? Three things:

(1) Strict antitrust enforcement which reduce their pricing power (even threatening such enforcement would make them more reluctant to raise prices).

(2) Unexpected profit tax This takes a portion of their last profit (and redistributes it to consumers), as Britain’s Conservative government does. And the

(3) publicity celebrity: The government should highlight highly profitable companies that raise prices blatantly (such as Tyson Foods and ExxonMobil).

13. So why does the Biden administration not pursue these people? It appears to be embarking on stronger antitrust enforcement, but it does so very quietly — so quietly that the big winners hold back from raising prices.

Biden she has He started highlighting the profitable companies that are raising prices. (Last Friday, he blamed the price hikes on oil and shipping companies. In a speech at the Port of Los Angeles, when asked about Exxon-Mobil earnings, Biden said He said “Exxon earned more money than God this year.”)

But he and his management seem strangely unwilling to criticize big business on a larger scale. and they have Not Embrace or advocate a windfall profit tax. I do not know why. It has enormous economic meaning.

14. Speaking of politics, what are the possible repercussions if the nation goes into recession? Bad news for Biden and Democrats. Although the presidents and the parties that control Congress do not have much influence on the economy, they are blamed for bad economics and get the credit for a good economy. Jimmy Carter and George HW Bush lost re-election because of bad economics.

15th. Ugh. specially. And that’s another reason why it’s so important to see Biden and Democrats take all of the actions I mentioned above — and to call in the companies and CEOs who use inflation as a cover for higher prices.