BIPR (2024)

US Economy is Headed for Recession

Converging global and domestic factors will cause the United States economy to experience a recession within the next 18 months. The looming economic crisis foretells a weakening of the domestic market and will become a prominent focus of the 2024 US election debates.

Analysis

The US economy will be simultaneously impacted by several factors: over-expenditures and dwindling funds in the aftermath of the COVID-19 pandemic, vulnerability of big firms, surge in oil and energy prices, and an inverted yield curve.

Covid-19 Effects and Inflation

The inflation spike that the US experiences can be traced back to the COVID-19 pandemic. In 2020, the US decided to print 3.3 trillion USD, an estimated one fifth of the money in circulation. This method, known as quantitative easing (QE), encouraged borrowing, and provided liquidity to the financial systems. The Federal Open Market Committee (FOMC) decided on two interest rate cuts, returning the federal funds rate to a range of 0%-0.25%. This stimulated consumption but lowered the value of the dollar, leading to inflation. In June 2022, the US experienced a 41-year record high inflation rate of 9.1%. Inflation rates have since dropped considerably, however, consumers continue to struggle, with a 3.7% Consumer Price Index increase from September 2022 to September 2023. This is due largely to diminishing household incomes and issues in supply-chains. The inflow of cash has also led to market volatility. The stimulus money that citizens received during the crisis has mostly run out, with reports showing that the least privileged 80% of Americans have less cash on hand than prior to the pandemic.

Among younger Americans, credit-card delinquency rates have increased continuously since the end of 2021, showing a lack of available funds. Additionally, debt rates in Q3 of 2023 surged by almost 5% compared to the previous quarter, indicating that banks are taking on too many risky loans. Student loan payments have also resumed after 3.5 years, potentially cutting into the growth rate by 0.2 to 0.3% in the fourth quarter of 2023.

Big Firm Turmoil and Layoffs

Many companies are initiating layoffs as they shift to AI-powered work, which will temporarily lead to a significant increase in unemployment until the work sector adapts and finds new ways to employ people. Job loss will contribute to lower consumer spending and an overall slowdown of the economy.

Tech companies alone have cut 253,000 jobs in 2023. Simultaneously, big companies have experienced a decline in economic activity, which obstructs their hiring processes, leading many consulting firms like McKinsey, Bain & Company, and BCG to delay start dates for new hires. In addition to domestic unemployment, the US is affected by stagnant economies around the globe. China, US' third largest trading partner, is also experiencing a significant economic downturn, stemming largely from its property crisis, with youth unemployment sitting at 21%. China's economy will have reverberating effects in the US labor market. Many American corporations, like Amazon and Starbucks, are threatened by unreliable Chinese manufacturing and supply chains.

Companies will experience turbulence due to domestic and international economic instability, which will be further exacerbated as half of the large and mid-sized banks in the US begin implementing stricter requirements for commercial loans.

Energy Price Spikes

Oil prices also indicate a coming recession. A barrel of oil has risen to 95 USD in October 2023, up 25 USD since Summer 2023. The price is projected to increase even further.

The sanctions that followed Russia's full-scale invasion of Ukraine will continue to increase crude oil prices. To replace Russian sources, the West turned toward Saudi Arabia for oil. However, Saudi Arabia and the Organization of the Petroleum Exporting Countries (OPEC) agreed to a 1.66 million barrels-per-day decrease in production until the end of 2024. Saudi Arabia and Russia additionally agreed to cut another one million barrels-per-day of production and 300,000 barrels-per-day of exports until the end of 2023, keeping rates of global oil production below global oil consumption. After Canada, the US gets most of its oil imports from OPEC and the Persian Gulf countries. The pressure on crude oil prices will persist, with the Brent spot price estimated to average 93 USD per barrel in 2024.

Inverted Yield Curve

Inverted treasury yield curves have predicted the last five recessions. The US is currently experiencing another inverted yield curve. This means that investors taking out loans pay more for short-term loans than long-term ones. When investors put more faith in short-term loans, they convey a lack of confidence in long-term yields. Additionally, the Federal Reserve Bank has hiked rates to 5.25% since early 2022. The effects of the hike on the economy will be seen in 2024.

Conclusion

The post-Covid economic backlash, in conjunction with faltering external economies and global conflict will directly impact US domestic interests, foreshadowing an emerging recession in the next 18 months with implications for consumers and investors both in the US and abroad.

Moxie Thompson is a Master of Arts in International Relations candidate at JHU-SAIS. Heracademic interests lie at the intersection of security, economics, and technology, particularly inrelation to transnational organized crime. Moxie received her BA in Political Science fromBoston University.