Could A Looming Recession Be More Severe Than Forecast?

Some economists say 'yes' and here's why.

Paul Davidson, USA TODAY  Thu, October 27, 2022

A recession is now likely next year, most economists say. But so far that grim warning has been accompanied by this silver lining: Any downturn almost certainly will be mild.  In recent weeks, however, the odds of a more severe slump that would mean millions more job losses have been rising, they say.

Some economists blame a Federal Reserve that’s aggressively raising interest rates in a single-minded mission to tame stubbornly high inflation, even if it risks a recession.

“If the Fed keeps raising rates it could cause more damage,” says Bob Schwartz, senior economist at Oxford Economics.

Economists also point to intensifying economic troubles in Europe, Chinese COVID-19 lockdowns that could escalate this winter, a sharp U.S. housing slowdown and even a U.S. job market that has been so resilient it's prompting even bolder Fed action, among other factors.

Is There Going To Be A Recession In 2022?

The most likely scenario is still a modest recession that lasts six to nine months or so. Eighty-eight percent of economists predict a downturn will be mild, according to a survey earlier this month by Wolters Kluwer Blue Chip Economic Indicators. But that’s down from 95% in October. That means the share of doomsayers has climbed to 12% from 5% within a few weeks.

What Is A Mild Recession?

A mild recession could cost the economy 1.8 million jobs if the nation’s gross domestic product, or economic output, declines 1.2%, and the unemployment rate rises from a 50-year low of 3.5% to 5.4%, estimates Wells Fargo Chief Economist Jay Bryson.

That outcome would be roughly similar to recessions of the early 1990s and early 2000s and less severe than the average downturn in which GDP declines 1.6%, say Bryson and Joseph LaVorgna, chief economist of SMBC Capital Markets.

It also would be far less damaging than the Great Recession of 2007-09 (with its nearly 4% drop in output and 8.7 million job losses) and the COVID-19 recession of 2020 (with about a 10% drop in output, and 22 million job losses).

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What Is A Severe Recession?

A severe recession could mean 3 to 4 million job losses, a 2% to 2.5% decline in GDP, and a 7% unemployment rate, Bryson says.

Such a slump, he says, probably would last longer, perhaps a year or 15 months, as a virulent cycle takes hold, with widespread layoffs leading to less consumer spending, which would spur more layoffs.

Most economists are forecasting a mild slump because consumers and companies are in good shape financially and so have at least some wherewithal to keep spending even if the economy weakens and some people lose jobs. Household debt amounted to 9.6% of disposable personal income in the second quarter, up from 8.4% early last year but well below the 13.2% peak in late 2007 and the average over the past 40 years, according to the Federal Reserve.

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