Opinion: It’s time to brace ourselves for another recession

Rising inflation spurred by the pandemic and Russian-Ukrainian conflict is pushing the U.S. economy down a familiar path.
<a href="https://highschool.latimes.com/author/kthekkinedath2006/" target="_self">Kevin Thekkinedath</a>

Kevin Thekkinedath

April 1, 2023
Our market may be nearing the point of recession, which will have devastating effects on the economy. While many are quick to compare today’s market to the Great Recession in 2008, our current financial state was caused by extremely different reasons than the ones responsible for the Great Recession.

The Great Recession was a sudden downturn in economic activity between December 2007 to June 2009. The main push factors of the 2008 crisis being the burst of the housing bubble and the global financial crisis during that time in the United States.

The issue began after the 9/11 attack in 2001. The U.S. was coming off of the 2001 dotcom bubble, which prompted a sharp increase in the valuations of technology companies. This led to a higher valuation for many companies, but soon, the bubble burst.

This caused a recession and many companies to crash. This fad along with the events of 9/11 pushed the Fed, the U.S. Federal Reserve, to lower interest rates in order to keep the economy stable. These low rates were held for a few years and in combination with homeownership encouragement, a boom in the housing market occurred. With the introduction of subprime and adjustable mortgages, mortgages used by those with subpar credit scores, more people were able to buy homes. 

However, from 2004-2006, the Fed began to increase interest rates to keep inflation stable. As a result, the rates on these new mortgages began to reset at higher rates, catching many off guard. Then came 2007, when the housing market crashed. Credit markets unfolded in turn causing banks who offered these mortgages to collapse as well. The series of crashes marked the start of the Great Recession in 2008.

Fast forward to 2022, the circumstances are different. Compared to 2008, interest rates began rising. Thus, the demand for many products is dropping as people can’t afford to purchase these things. But why are interest rates going up?

We can look at two important events to better understand this trend. The first is covid and its effects on the economy. The entire world struggled during the pandemic, rocking our economy. Many are still fearful of the economy’s status due to these effects, harming the market. When covid began, the supply of products began to bottleneck. Many large manufacturers in countries like China began to shut down, preventing goods from being made and shipped at a normal rate. Because of this, prices rose but people couldn’t afford to purchase these products. 

As a result, the U.S. and global governments issued stimulus checks, which in turn fueled the growth of many technology companies. This led to a better evaluation for these companies, but all of this changed when the pandemic calmed down. Governments stopped providing stimuli, causing many of these tech companies to have a downturn in their evaluations. A prime example is Facebook. Before the pandemic in 2019, Facebook was nearing its all time high, but when Covid ended, Facebook’s valuation dropped to an all-time low.

The second event spurring increased interest rates was Russia’s invasion of Ukraine. The U.S. responded to Russia’s actions by issuing trade sanctions. Due to the U.S.’s strong alliances with the EU, many EU nations issued their own sanctions on Russia. However, countries like Germany are major customers to Russia’s oil market. These countries were forced to turn to other member nations of the OPEC, the Organization of the Petroleum Exporting Countries. Due to such high demand, members of the OPEC raised prices of a barrel of oil, inflating them. The pandemic paired with the Russia-Ukraine conflict caused inflation to rise in the U.S., triggering a response from the Fed.

The Fed’s plan is to increase rates to curb inflation, however, many fear another recession. Prices can either go up or down. If prices continue to rise, rates will rise with it. But if prices drop, there is the possibility of a global recession, pushing the Fed to deflate in the future. 

Many people wonder though, how do we know a recession is coming? There are a few tell tale signs we can see. The first is a decline in GDP. Real GDP is a country’s GDP after inflation, and right now, we can see the real GDP is dropping. The second is the decline in real income, or our income after adjusting for inflation. Third, is the decline in employment. Workers are being laid off, similar to 2008 when 8.7 million jobs were lost. Industrial production is also dropping as products are becoming too costly to manufacture. Finally, inflation is causing a decline in wholesale and retail sales as overpriced items are deterring many buyers. 

Unfortunately, the Fed’s current actions are not helping the rising fear among Americans. The stock market is tumbling, and prices are only getting higher, begging the question: Is recession the only path our economy faces?

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