Downtime

A recession in the United States is “certainly a possibility,” in the typically measured words of Federal Reserve Board Chair Jay Powell—speaking to the U.S. Congress on June 22, as evidence mounted that the country’s economic problems were getting worse than they’ve been in decades. Last month, inflation hit 8.6 percent, the most significant year-to-year increase in 40 years. The price of gasoline is now between $5 to $7 a gallon, depending on the state—an unprecedented rate in a country where millions drive long distances to work—while the costs of food and other basics are also rising steeply. Most Americans’ confidence in President Joe Biden’s ability to manage the economy is dropping, as the chances of widely expected losses for his Democratic Party in the November midterm elections are increasing. To counter inflation, the U.S. central bank, the Federal Reserve, raised its main interest rate on June 15 by 0.75 percent, the biggest hike in nearly 30 years. Average prices on the U.S. stock market, meanwhile, dropped by 20 percent this month from their most recent peak, the sharpest decline since the Great Recession of 2008-2009. What’s next?

Claudia Sahm is an economist, and former section chief for the U.S. Federal Reserve’s Board of Governors, who worked as a senior economist on President Barack Obama’s Council of Economic Advisors. In Sahm’s view, a dire outlook on the American economy is understandable right now, because the financial struggles Americans are experiencing, with costs and interest rates climbing, are real and acute. Still, Sahm says, a broader view of the economy offers positive signs too, especially in the job market. The next few months could realistically play out in a number of scenarios—and while some are grim, others range to the hopeful. As the Federal Reserve attempts to cool inflation, its policies could wind up either causing Americans minimal pain or plunging the country into a severe recession. Avoiding the worst of the scenarios, Sahm says, will require some success in further containing the coronavirus, limiting the economic harm of Russia’s invasion of Ukraine, and addressing remaining challenges in the world’s supply chains. For now, though, unpredictability on all these fronts will continue to mean uncertainty for the economy.

Michael Bluhm: What’s happening in the U.S. economy right now?

Claudia Sahm: Since Covid caused a severe global recession in 2020, the past two-and-a-half years have been one economic crisis after another. Recessions hit everyone—a recession means that a country’s entire economy goes into a downturn. Nearly everyone gets hurt financially. The industries hit hardest often take more time to recover; it often takes people longer to get jobs back in them.