Many economists believe the U.S. (and much of the world) will fall into a recession later this year. The primary cause will be inflation. There have been some radical solutions suggested. Larry Summers, a prominent economist who has been Treasury Secretary and President of Harvard, recently commented to Bloomberg: “The right thing to do is to raise taxes right now to take some of the demand out of the economy.” While that may drop the rate of inflation, it would also damage GDP growth because it would lower consumer spending power.
There are two sides in the battle for the U.S. economy. One is the Federal Reserve which has raised interest rates modestly to slow the economy. Its efforts are aimed at not slowing it too much. The other force is measured by the Consumer Price Index which shows inflation rose 9.1% in June compared to the same month a year ago – a four decade record.
Another factor that might be considered as the economy sputters into the second half of 2022 is consumer confidence. It has sent out conflicting signals. Consumer confidence is low as measured by the University of Michigan Survey of Consumers. However, retail sales continue to be brisk.
The health of the housing market could also affect the direction of the economy. Most people’s largest asset is the equity in their homes. Over the last year, home prices have risen 20% year over year most months as measured by the carefully followed S&P Case-Shiller housing report. Home equity has, therefore, risen, for tens of millions of Americans.
The state of the housing market has already begun to move in a negative direction as high mortgage rates have slowed the increase or dropped the the rate at which home prices have moved. Nevertheless, home prices remain at a record and hit a national median of over $400,000 recently.
The American economy has rarely dodged recession in a period of extremely high inflation. And, that is, despite other factors, the primary characteristic of the economy now and will probably be until the early parts of 2023.
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