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Fellow ID: FE-01674

Name: Tushar Xaxa

Date: 1st August 2022

Upcoming Recession in USA and its Effects on Startup and Fundraising Environment

Introduction

US inflation is at a four-decade high, borrowing costs are surging and stocks have

taken a beating. With the Federal Reserve going full steam ahead on an aggressive campaign

to temper demand and tame prices, concerns are growing that its moves will tip the US into

recession. There is no shortage of opinions about whether a downturn is inevitable, when it

might start and how bad it might be.

Not long-ago recessions seemed to strike America roughly once a decade. But only

two years after the first lockdowns, the business cycle is turning at a sickening speed and

another one already seems to be on its way. If you are like most people, your memory of

downturns will be dominated by the past two—the financial heart attack in 2007-09 and the

pandemic-induced collapse in 2020. Both were severe and highly unusual. By their standards,

America’s next recession will almost certainly be milder and more pedestrian. But because

the world economy, asset markets and America’s politics are all fragile, it may yet have nasty

and unpredictable consequences.

What Causes a Recession?

Previous recessions have been brought on by market-related shocks to the economy.

Examples include the financial crisis of 2008, which was sparked by lax lending standards

and a housing crisis, or the dotcom crash of the early 2000s, which followed overly

enthusiastic investment in technology stocks. The Federal Reserve, the central bank that

oversees America’s monetary policy, works to prevent recessions through its policy

decisions. In recent months it has increased interest rates to combat inflation.

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A delicate balance is needed when creating monetary policy. According to NPR, an

increase in interest rates that was too rapid for the economy to bear was the root cause of

more than two-thirds of the recessions Americans have seen since World War II. The Federal

Reserve raised interest rates by 0.75% in June and 0.75% again on July 27; however, it will

take some time before these increases start to have effect. Additionally, COVID-19 has had a

significant effect on the economy. In order to save lives, livelihoods had to be given up,

which reduced global and American production significantly. As of right now, inflation has

reached a 40-year high, peaking at 9.1 percent in June.according to the U.S. Bureau of Labor

Statistics.

Inflation is harmful because it “reduces your salary or income, because your income

isn’t increasing as much as inflation” according to Hughes. It decreases your ability to buy

things, your ability to save money, and the worth of your home. Although the epidemic is far

from over, consumers' increased spending in the months after COVID-19's worst effects

meant that providers at first found it difficult to keep up with demand. Since then, retailers

like Target and Walmart have had difficulty predicting the precise quantity and kind of goods

shoppers will require, leading to an excess of unsold inventory. These significant errors add

to the slowing growth that could cause the United States to enter a recession.

Effects of Recession

Fed Interest Rate Hikes: The higher interest rates rise, the more expensive it becomes

for U.S. companies to borrow money to invest in innovation and growth. Rising credit card,

mortgage, auto loan and other interest rates also reduce the disposable income Americans

have to spend in the economy, weighing on corporate earnings and stock prices.

Inflation and Supply Chain Disruptions: Supply chain disruptions in Asia and

economic sanctions against Russian oil and gas have exacerbated the U.S. inflation problem

that began in 2021. The Federal Reserve also underestimated how aggressively it would need
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to act to bring inflation under control. Consumers are feeling the brunt of increased costs for

everyday goods and services. The Bureau of Labor Statistics reported on July 13 that the

consumer price index (CPI), a measure of the cost of living, soared by 9.1% from last year.

The fast rise in CPI is another inflation warning not seen in four decades.

The Case Against Recession

Many experts contend that the economy is now too robust to classify the current

situation as a recession, despite market concerns and warning indicators. The most recent

U.S. jobs report, according to Peter Essele, head of portfolio management for Commonwealth

Financial Network, should soothe investors. "The rate of job growth year over year is 4.31

percent, the highest increase in over 40 years. When pay growth is the best in decades and job

growth is still substantially above long-term averages, it is challenging to refute claims that

the economy is in a recession, says Essele. The strong U.S. job market, according to Quincy

Krosby, chief equities strategist for LPL Financial, indicates that a U.S. recession is not near.

Fears of a recession, however, cause a change in consumer behavior.

“Because of the market’s intense focus on whether we’re currently in a recession or

heading into one, the oft-told comment by economists that it’s important to watch what

consumers do that counts and not what they say has become increasingly important,” Krosby

says. According to him, consumers in the United States make up about 70% of the global

economy and are feeling the pinch from rising petrol prices, loan rates, and grocery costs.

The consumer sentiment index from the Surveys of Consumers at the University of Michigan

dropped to its lowest level since the middle of the 1970s in June.

According to Krosby, "Retail sales statistics should provide some of the most

significant signals as to where the economy is headed." These reports should be combined

with what consumer-related businesses tell us about their customers' spending patterns. For
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investors who are keeping an eye on the economy, the second quarter earnings season and

management comments from large consumer discretionary businesses like Amazon (AMZN),

Tesla (TSLA), and Home Depot (HD) might be especially instructive.

Conclusion and Suggestion

If the US economy does contract over the next two years, it may potentially change

the country's long-term course. Pro-growth changes like lower tariffs and increased

competition would be the ideal response to a recession where inflation remained high.

Recession, on the other hand, can encourage populism and protectionism and perhaps bring

Donald Trump back to the White House. Three of the previous four recessions occurred

concurrently with or immediately before a presidential election. Each time, the political party

in charge of the White House was ousted. If the next recession is judged by the technocratic

standard of lost GDP, it might be small. But not when it comes to its influence on American

politics, asset markets, and the developing world. Don't undervalue the dangers that are

coming.

Although many Americans are concerned about an impending recession, there is still

time to make adjustments. The fact that we predicted this recession is incredibly unique and

frankly weird, but Sahm said that it might be an opportunity for families to get ready in a way

they never had. Economic experts advise consumers to save some money if they can. They

can use the buffer that savings will provide them in the future, and cutting back on

consumption may also help to lower inflation. Furthermore, despite predictions from both

Sahm and Hughes that low-wage employees, particularly those of color, will be

disproportionately affected by a recession, neither economist thinks one will occur until at

least next year. People shouldn't freak out, Sahm remarked. “This is not a done deal and

recessions are always bad, but this has all the makings, if it happens to be a mild recession.”
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References

1. https://www.npr.org/2022/07/28/1113649843/gdp-2q-economy-2022-recession-two-q

uarters

2. https://www.bloomberg.com/news/articles/2022-07-27/us-economy-seen-narrowly-av

erting-so-called-technical-recession

3. https://www.bloomberg.com/news/articles/2022-07-28/us-economy-shrinks-for-a-sec

ond-quarter-raising-recession-odds

4. https://youtu.be/Gsli_29-rwI

5. https://www.economist.com/leaders/2022/06/02/a-recession-in-america-by-2024-looks-likely