Many economists believe there will be a recession later this year or early next. Consumer research shows that some Americans believe a recession already has begun. Inflation became a major factor in their belief when prices started to rise much faster than income. The debate about recession has moved from whether there will be one to how bad it will be.
The Great Recession was arguably the worst recession since the Great Depression. The Great Recession ran from 2007 to 2009. Among its hallmarks were a 5.1% drop in gross domestic product and unemployment that peaked at 10.1%. The other effect millions of Americans felt was a drop in home prices of more than 50% in some regions. Whatever homeowners had gained in home equity over years or decades was erased. Many homes were worth less than their mortgages.
The home price slide caused some Americans to feel poor. Their homes were their major assets. They may even have been the primary source of savings for retirement. These people stopped consuming all but the necessities.
Unemployment in America was 3.6% in June, one of the lowest points since World War II. There is also a surplus of workers. In 2006, unemployment was 4.4%, so over the course of the Great Recession, it more than doubled.
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Could national home prices drop by 10% or even 20%? Consider that they have risen 20% year over year most months this year, according to the S&P Case Shiller index of home prices. A primary reason for this was incredibly low mortgage rates. The housing market already has cooled in some parts of the country because mortgage rates have risen above 5%. If the Federal Reserve continues to raise rates, that could go higher. The affordability of homes will begin to take a toll on house prices.
Inflation can kill consumer spending. It also can cripple the margins of businesses. Many experts expect inflation to stay above 8% for the balance of the year. Prominent economist Larry Summers believes that to bring down inflation, unemployment will need to be 7.5% two years over the next five or 10% in one of those years. His exact quote, as recorded by Bloomberg, was, “We need five years of unemployment above 5% to contain inflation—in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment.”
Another Great Recession? It is not unimaginable.
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