Will the economy collapse?

What do you want to know

  • Here are the main factors influencing the economic – and market – situation in the United States today.

With the recent volatility in the markets and the economy, that’s a question a lot of people seem to be asking. Some of those asking may be your customers.

The answer, of course, is that no one knows for sure what the future holds for our economy. That said, there are several key factors influencing the economic – and market – situation in the United States today, which are outlined below:

Impact of the war in Ukraine on the US economy and markets

The situation in Ukraine has affected our economy and markets and will likely continue to do so, according to many experts. In a conversation with ThinkAdvisor earlier this year, Bob Dollchief investment officer at Crossmark Investments, highlighted 10 key areas for investors and advisors to keep in mind in 2022, including:

  • Inflation.
  • Higher oil prices.
  • The Federal Reserve is raising interest rates.
  • The stock market will be down for part of 2022.

We’ve seen the impact of these issues and other areas of concern cited by Doll. Over the past few weeks, we have seen a stabilization of inflation in some regions, a drop in gas prices and a recent recovery in stock markets. Time will tell where we go from here.

Effects of inflation on the US economy

We have witnessed the effects of inflation on the US economy in several ways this year.

Continued high inflation is the main reason for the Fed’s decision to raise interest rates. Higher rates affected the housing market due to rising mortgage rates. They have also increased the cost of borrowing for many businesses.

Inflation has affected consumer spending, with major retailers such as Walmart noting that they have seen consumers cut spending on items like clothing. They expect to see similar reductions on other discretionary items like furniture in the near future.

We have also seen significant wage inflation, driving up costs for a number of companies. In turn, they must raise the prices of their goods and services to anticipate rising labor and raw material costs.

Economic crashes vs stock market crashes

An economic crash occurs when the US economy essentially shuts down. An economic crash or total collapse is unlikely; the last we experienced was the Great Depression of the 1930s. Even the financial crisis of 2007-09 was “just” an economic crisis.

Stock market crashes are more frequent. We certainly experienced one in 1987, known as Black Monday. There were also accidents in 2008 and 2020 as a result of the COVID pandemic. And of course, the stock market crash of 1929 would have triggered the Great Depression that followed.

We also had a crash this year, with the S&P slipping into bearish territory in June after falling more than 20% from its peak last November. We have experienced a partial recovery over the past few weeks.

Is the United States in a recession?

Like most economic questions, the question of whether or not we are in a recession is open to debate.

For one thing, the unofficial but often accepted definition of a recession is two consecutive quarters of declining gross domestic product. By this definition, the US economy is in a recession, with first-quarter GDP down 1.6%, followed by a 0.9% drop in the second quarter.

The official declaration of a recession comes from a group of academics at the National Bureau of Economic Research, specifically its Business Cycle Dating Committee. So far, there have been no declarations that we are in a recession, but often these proclamations come months after the fact.

Factors indicating a possible recession beyond the GDP indicator include:

  • The decline since the beginning of the year in the stock market.
  • High inflation.
  • A drop in consumer morale. Economist Gary Shilling recently pointed to a resumption of Google searches for “recession” as an indicator of weaker consumer sentiment.
  • Higher overall interest rates fueling higher mortgage rates.

On the other hand, Federal Reserve chief Jerome Powell has always insisted that we are not in a recession and points to several indicators of strength in the economy, including robust job growth. The July jobs report showed the economy added more than 528,000 jobs, virtually erasing job losses resulting from the pandemic.

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