The inflation has got you down. The recession has got you down.
Wait, hang on a minute.
Both inflation and recession are bad terms in economics, but just because one is high doesn’t mean the other is a sure thing, or even happening. Market-watchers and economists, most famously Larry Summers, have been sounding the inflation alarm for over a year now, and the slide close to a bear market has CEOs such as Jamie Dimon seeing an economic “hurricane” coming.
But just because you have the first thing, doesn’t mean you’ll have the second. Something psychological may be going on in markets.
So far, inflation has exceeded wage growth for many workers, but wages have still grown substantially over the past year. And the shocking nature of gas surging to $5 a gallon seemingly overnight may have further erased the relatively subtle progression of wage growth.
“You have a yardstick that you measure things by, and it’s changed. That’s sort of disconcerting,” Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and a former director on the Federal Reserve board, told Fortune.
Inflation feels very bad because your money is worth less, while a recession feels very bad because the economy is creating fewer jobs. Here’s how to keep your head straight about these two very different economic trends.
Two different things
Inflation and recession describe the momentum of an economy. Inflation makes the economy barrel forward at full speed, sometimes uncontrollably, leading to price surges and a higher cost of living for the average consumer. A recession would be the opposite, a much slower economy marked by a decline in economic activity and potentially higher unemployment.
Simply put, inflation hits household finances. A prolonged period of inflation means that prices will continue to increase and the same amount of money will buy you less and less over time. Wages tend to rise naturally during inflation to compensate for this, since inflation is a byproduct of a surge in demand, meaning economic growth, but people with fixed incomes like pensioners have no such luck in that case. If inflation gets out of control, everyone feels poorer.
Inflation can also be a burden to low- and middle-income households who have fewer savings or diverse hedges against inflation to fall back on. Inflation could even push some households which have recently left poverty right back into it.
On the other hand, inflation can actually help people further down the income scale who have debt because, as inflation goes up the debt stays in place effectively making it cheaper to service.
Both inflationary and recessionary periods hurt, but they do so in different ways. Consumer prices in the U.S. are running 8.3% higher than last year, and higher costs for critical items, including food, fuel, and housing, are grabbing the attention of every American.
Unlike inflation, which is very much a reality, we are not in a recession yet, or at least not officially. A recession is defined by the National Bureau of Economic Research (NBER), a nonprofit organization that analyzes economic business cycles in the U.S., as a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
This “significant decline” almost always takes place over two quarters, according to the NBER, which means that we won’t know for sure if we are in a recession until the GDP figure comes out for the second quarter, which ends in June. GDP fell 1.4% in the first quarter of 2022, a sharp drop from the 6.9% jump in the last quarter of 2021, meaning that until second quarter figures are released, we could already be in a recession without knowing it.
Maybe a mild recession
Even if a downturn does hit, many economists agree that it probably won’t be as bad as the market crashes in 2008 and 2020 that immediately come to mind when hearing the word “recession.”
“If it’s a mild recession, most people probably won’t be worse off. A few people could lose their jobs on the margin, but the unemployment rate won’t go up too high,” Gagnon said.
Unemployment has stayed remarkably low throughout inflation, and the job market is still as hot as ever. The U.S. economy added 390,000 jobs in May, surpassing expectations and boosting hopes that the strong economy might be able to weather a mild recession.
“Recessions can hurt a lot of people, not just those who lose their jobs,” Gagnon said, but he added that “it’s possible that you have a mild recession, and maybe stock prices won’t go down much more and house prices won’t fall too much and only a few people lose their jobs. Then you’ve had as mild a recession as possible.”
Gagnon said he is not yet sure that a recession is a certainty, joining other economists who have said the same, and that if one does hit, chances are favoring a less severe outcome.
“My bet is that it would be mild. It would not be as severe as the last two, and unemployment wouldn’t rise as much as in the last two,” Gagnon said, adding that unlike the past two recessions, which were respectively fueled by a housing bubble collapse and the pandemic, this one’s outcome remains entirely within the control of the Federal Reserve’s policies.
A mild recession that manages to hold on to low unemployment would spare most workers from layoffs. And if the Fed is able to bring down inflation relatively soon, a contracting economy might not be as bad as it now seems to be.
