With unemployment so low and inflation so high, are we heading toward a recession?

LAFAYETTE, Ind. — To say that the U.S. economy is doing well would be a lie.

Nationally, people are feeling the effects of inflation through the price of gas and the increased cost of living.

The financial spectrum of the economy isn’t immune to its effects either, as, over the last year, the stock market has seen a constant decline in the performance of the NASDAQ, which usually

With the growing finical burden of the economy falling on the shoulders of everyday people, it makes sense why people have started to ask the question: Are we heading for a recession?

The Journal & Courier reached out to Dr. Timothy N. Bond, an associate professor of economics in the Krannert School of Management at Purdue University, for some insight on the question.

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“It used to be that the textbook definition was, ‘Two consecutive quarters of a decline in GDP, but that’s no longer the official definition anymore. So, you can forget about all of that,” said Bond.

“A recession is just a slowdown in the economy, and usually what it’s associated with is a shrinking gross domestic product, rather than growing. Then it’s associated with when GDP goes down and that means unemployment is going to go up because you’re making less stuff, you’ll need less workers to make less stuff. So that’s more or less what a recession is.”

Bond doesn’t believe that the U.S. is currently dealing with a recession, instead, he believes what Americans are feeling is the byproduct of out-of-control inflation rates.

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“I think we are in a really weird spot right now with the economy, because right now we’re not in a recession; we’re in an overheated economy. Where inflation is out of control and unemployment is very low. And everyone thinks a recession is coming because they think there’s absolutely no way, we can get inflation under control with there being a recession.”

As of May 2022, the rate of inflation was estimated to be around 8.6%, which was the largest annual increase since December 1981 and after rising 8.3% previously, according to U.S. Labor Department.

In contrast, the U.S.’s current rate of unemployment sits around 3.6 %, which mimics pre-pandemic rates.

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Perhaps the main reason why folks believe a recession is likely to occur within the coming year is because it harkens back to similarities that caused the 1980s recession, which was primarily caused by policy responses to inflation.

“The major one that this resembles is — if you look for parallels you can find some '08 in it, you can find some dot-com bust in it, but I think the one that this really resembles is the early '80’s recessions because it’s triggered by the necessary policy response to inflation.," Bond said.

“There are commonalities; inflation really is the major economic problem right now, and the tool to get inflation down is to cut federal spending, raise taxes and raise interest rates and none of those things are good for unemployment.”

Although there are many similarities to the 1980s recession, Bond doesn’t believe that it ends in a similar manner. This is in large part due to the American public’s attitude towards inflation.

“The difference though is that in the 1980s recession, we had been coming off five to 10 years of high inflation. And so, part of the policy was in the 1980s was that you had to creditably convince the public that we were not going to have inflation in the future. The reason for that is the inflation perpetuates inflation.

“For us right now, we’re only a year into high inflation, which is a long time, but right now it seems like most people view this as a problem that can be fixed, supposed to a problem with our society. You know, something that is baked into our economic system.

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“And so, the hope is that, in order to get rid of this inflation we won’t have to act as strongly as long. But we still have to act strongly. If you don’t act strongly, then we’re going to end up in a situation like the 1980s.”

Luckily, the Federal Reserve has also learned from the mistakes of past administrations. In the 1980s, the Federal Reserve drastically increased the interest rates in hopes of fighting inflation. This sudden change ended up disrupting the lives of people, from a significant increase in loan payments and more, according to Bond.

Instead of drastically increasing the interest rate, the Federal Reserve instead is opting to take a slower approach by raising interest rates at a pace in which Americans can adjust to.

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“What you hear a lot is that the Federal Reserve is trying to orchestrate ‘A Soft Landing,'” said Bond.

“A soft landing would be, over the next 12 months we're going to gradually increase the interest rates, and we’re going to do it in a way that doesn’t shock the economy. And so the job losses are going to be minimal, and maybe the unemployment rate goes from 3.6% to 5%. And we bring the inflation rate down from 9% to 4%, and the year after that we can get it from 4% to 2%.

“We’ll be able to do it in a way that’s so gradual that it’s not going to be a major disruption to economic activity.”

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Although Bond also highlighted that the U.S. has not had a solid track record when it comes to achieving these soft landings.

In the case in which the Federal Reserve is not able to achieve this “soft landing” approach, then Bond expects the Feds will end up doing a “hard landing” on the economy, which could create the perfect conditions for a recession.

“A hard landing would be, over the span of the next 10 months the unemployment rate doubles or more than doubles. A lot of people will be out of work and a lot of businesses will go under. So that would be a hard landing.”

So, in answer to the question, “Are we heading into a recession?" the response all depends on how the federal reserve sticks the landing. They will have either learned from their predecessors, or the economy will become a sequel to the 1980s, “The 1980s Economy 2022: Electric Boogaloo.”

Noe Padilla is a reporter for the Journal & Courier. Email him at Npadilla@jconline.com and follow him on Twitter at 1NoePadilla.

This article originally appeared on Lafayette Journal & Courier: Low unemployment, high inflation: Are we heading toward a recession?