The U.S. economy shrank last quarter. Is a recession next?

Americans are increasingly worried about the economy, with about 6 in 10 concerned that a major recession is “right around the corner,” according to a recent survey from AllianzLife. The reasons for their anxiety are clear: Economic activity shrank in the first three months of the year, inflation is at a 40-year high and the stock market is sliding.

Despite those signals, most Wall Street economists do not expect a recession this year. More likely, they say, is a “hard landing” in 2023 linked to the Federal Reserve’s move to hike interest rates. Such monetary tightening, which is aimed at dampening inflation, could backfire if consumers and businesses pull back too quickly, according to experts.

Although economists don’t predict a slump in the current year, consumers and businesses are battling several headwinds that are hitting their pocketbooks. For instance, worker wages are rising, but inflation is gobbling up those gains, putting household budgets in the red. Businesses are constrained by supply-chain bottlenecks and employee shortages, adding to the costs of their operations.

Meanwhile, the Fed is hiking interest rates to cool inflation. The central bank’s strategy: Boost borrowing costs in order to tamp down demand from consumers and businesses. The central bank’s rate-setting panel meets this week, and many analysts expect it to boost rates on Wednesday by half a percentage point, according to FactSet. 

Despite these problems, Americans are continuing to open their wallets, providing key support for an economy that relies on consumer spending for 70 cents of every $1 of GDP.

Here’s what economists are saying about recession risks. 

What is a recession?

An economy is considered to have entered a recession if it experiences a decline in GDP for two consecutive quarters. (This chart from the Federal Reserve Bank of St. Louis shows when the U.S. entered and exited recessionary periods since 1970.)

Under that definition, the 1.4% drop in first-quarter GDP doesn’t constitute a recession, although it marks the first contraction since the brief but deep coronavirus-driven recession in 2020. 

Why did the economy shrink this year? 

The main factors behind the first-quarter downturn: a sharp drop in U.S. exports; slower restocking of goods in store and warehouses; and decreased spending by federal, state and local governments.

Yet at the same time, consumers and businesses spent heavily, with personal consumption expenditures, nonresidential fixed investment and residential fixed investment all increasing. 

Economists expect second-quarter GDP — the period running from April to June — to increase 2.9%, according to FactSet. For 2022, economists expect growth to increase by 3.3%.

What is the risk of a recession in 2022? 

Most economists say the odds of a recession are low this year given the underlying strength of the U.S. economy. Consumers are spending, businesses are hiring and wages are growing. The labor market also remains in good shape. Credit rating agency Fitch forecast that the U.S. will have recovered all of the jobs lost during the COVID-19 pandemic by the third quarter of 2022.

“Hawaii and Louisiana are the only states to not have recovered at least 70% of all jobs lost during the pandemic,” the firm said Monday in a research note.

While acknowledging that consumer fears of a recession “are worrying,” Kathy Bostjancic, chief U.S. economist at Oxford Economics, told CBS MoneyWatch in an email that “for now they continue to spend.”

“The next couple of years will be bumpy ones for the economy, with high inflation and slower growth,” said PNC Chief Economist Gus Faucher in a research note. “The likelihood of recession in the U.S. is now about 30%, up from 15% before the Russian invasion of Ukraine.”

What about next year? 

Economists say recession risks are higher 2023, especially if the Fed’s interest rate hikes snuff out demand from consumers and businesses or if its strategy fails to temper inflation. Their consensus forecast for 2023 is that GDP will grow by 2.3%, according to FactSet.

Others are more pessimistic. Deutsche Bank economists predict a hard landing for the economy next year, noting the Fed’s monetary tightening. 

“We do expect we will see a recession by the end of next year, but this wasn’t the start of it,” the bank’s chief U.S. economist, Matthew Luzzetti, told CBS News, referring to the first-quarter decline in growth. “We think we’ll see strong growth the remainder of this year.”

But, he added, the U.S. will likely enter a “mild recession” by the end of 2023 triggered by Fed rate hikes. Deutsche Bank thinks the Fed will follow its expected rate increase on Wednesday with two additional half-point increases later this year. 

“Our view is that the only way to minimize the economic, financial and societal damage of prolonged inflation is to err on the side of doing too much,” noted Deutsche Bank chief economist David Folkerts-Landau in a research note. “The labor market and household balance sheets are strong, and the only way to push down aggregate demand is to raise rates higher and faster than might seem reasonable.”

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