Recession Probability Gauge Soars to Levels Not Seen Outside of Downturns

Federal Reserve Chairman Jerome Powell news conference is displayed on televisions while traders work on the floor at the New York Stock Exchange in New York on June 15, 2022. Seth Wenig/AP Photo

As inflation continues to rise and the Federal Reserve attempts to fight the current with rate hikes and quantitative easing, economists have begun to assess the likelihood of a recession at levels only previously seen before the beginning of the Great Recession during the late 2000s, according to new survey data.

Economists surveyed by the Wall Street Journal in June assigned a 44 percent chance of a recession occurring within the next 12 months, a sharp increase from the most recent round of the same survey last April, in which economists only saw a 28 percent probability of a recession. The number has risen even more drastically since the prior survey in January, in which economists assessed the risk of a 2022 recession at only 18 percent.

This is especially notable, as a prediction this high only occurs in times when an economic downturn is imminent. In December 2007, on the eve of the Great Recession which ensued later that month and continued throughout the summer of 2009, economists only assessed the likelihood of a recession at 38 percent.

The Wall Street Journal survey aligns with statements from many banking executives and other business experts, who with increasing frequency forecast a recession on the horizon. In a note published last Friday, the Bank of America predicted that economic growth would stall by mid-2023. While the bank still considered the probability of a recession in 2022 as relatively low, they assigned a 40 percent probability of a recession occurring in the next calendar year, suggesting troubled waters on the not-too-distant horizon.

The probability of a recession is intimately linked to the persistent trouble of inflation, which has continued to rise in the past year and raised alarm that more severe measures may be necessary to stabilize the U.S. dollar. While the Federal Reserve has attempted to stymie inflation with an increasingly aggressive regimen of interest rate hikes, progress has been sporadic. Though the rate of inflation fell in April, this progress was reversed by the figures revealed in the most recent report of the Consumer Price Index, in which the inflation metric hit a new high of 8.6 percent annual inflation—the highest rate since the period ending in December 1981. The Federal Reserve responded by imposing an interest rate hike of 0.75 percent on June 15, the most severe hike since 1994.

While rate hikes are generally agreed by economists to have a deflationary effect, they are accompanied by a number of undesirable side effects, chief among which is a reduction of economic activity and higher unemployment rates. While unemployment remains low after a remarkable rebound from the highs seen in April 2020, equity markets have suffered a major downturn this year, as major tech stocks such as Amazon, Apple, and Netflix erased many of the gains made in the previous two years.

The factors contributing to recessionary pressure are multitudinous: In addition to the Federal Reserve’s escalating hawkishness on inflation, the economy is beset by supply chain issues stemming from the increase in consumer demand and labor disruptions of the CCP (Chinese Communist Party) virus pandemic. Furthermore, Russia’s ongoing invasion of Ukraine has caused scarcity in the global fossil fuel supply, which has been reflected in higher gas prices contributing to further inflation.

As reflected in the Wall Street Journal survey results, economists are still far from a consensus that a recession is imminent in the coming year—there is still considerable skepticism on this point. However, the prospect has come to seem far more likely in recent months as many indicators trend in that direction, causing many to reassess their initial estimates that such a protracted economic downturn would follow in the more remote future.