While fears of an immediate US recession have not been confirmed, the latest GDP report points towards a shrinking economy. GDP contracted by 0.9%, the second-straight quarter of decline, while inflation hit a four-decade high of 9.1%.
While technical recessions are defined as two-straight quarters of GDP decline, many public officials and government entities, including the White House, have pushed back against calling the current state of the US economy a recession. Regardless of where we stand, the economy is undoubtedly in a volatile phase.
Is the Economy in a Recession?
While GDP has slumped for two-straight quarters, experts suggest that it’s not likely that the United States has entered a full-blown recession. Gus Faucher, the chief economist of PNC Financial Services Group, says that “economic growth slowed in the first quarter of 2022, but the US economy is not in recession.”
Janet Yellen, US Treasury Secretary, said recently on NBC’s Meet the Press, “This is not an economy that’s in a recession,” alluding to the overall strength of the economy through job growth.
“When you’re creating almost 400,000 jobs a month, that is not a recession,” said Yellen.
The country experiencing the second quarter of economic decline in a row sets a worrying precedent for the foreseeable future. A true recession could still hit the US—just not straight away. What investors and consumers should pay particular attention to right now are the rapidly rising interest rates.
Earlier this week, the federal funds rate was raised for the fourth time this year by 75 basis points, now sitting between 2.25% and 2.5%, the highest since summer 2019.
Jack Ablin, Chief Investment Officer at Cressett Capital, told USA Today, “This is really what the Federal Reserve is raising rates to try to combat. The more persistent inflation is, the more aggressive the Federal Reserve has to be.”
A combination of steep interest rate increases and an economy that is slowing down can create the perfect storm of a high cost of living, reduced consumer spending, high unemployment, and reduced government spending. Consumer spending, for instance, is already slowing down. In May, it fell from 0.9% growth the month prior to just 0.2%.
The ongoing Russia-Ukraine war is also putting enormous pressure on oil and food prices, which have hit consumers hard. Economists have been drawing parallels between the current situation and the stagflation of the 1970s for several months now, with leading experts sounding alarm bells.
Economist Nouriel Roubini, known for his eerily accurate predictions of economic crashes, recently told Bloomberg that the US economy was “on the precipice of a serious downturn,” comparable to the 1970s and 2008.
The Implications For Real Estate
Even if a recession doesn’t hit, anyone considering buying a home or investing in real estate must make their moves with the economic environment in mind. The rapid, combative interest rate hikes will inevitably drive up mortgage rates, likely locking out more homebuyers and further pull back demand. Of course, this is part of the Fed’s intention.
This doesn’t mean that investors need to panic and make rushed decisions. Once again, it is important to stress that while the above factors create the conditions that make a recession a strong possibility, the country is not technically in a recession despite the GDP decline. The job and housing markets remain robust, and it will take at least until the new year to see how much steam the economy’s lost.
A vulnerable economy doesn’t equal a crashing economy, and not all economic experts are confident that a recession is guaranteed. Goldman Sachs’s current prediction is a 30% chance of an economic downturn within a year. Flip that, and it’s a 70% chance of the economy remaining stable albeit sluggish, a danger in itself.
Wells Fargo does not predict a recession until 2023, a prediction that, where it proved to be true, would give investors plenty of time to consider their options.
Remember: the housing sector remains buoyant, with record numbers of homebuyers still saturating the market. According to Redfin, over 55% of homes are still selling over list price.
This will not dissipate overnight, nor will people lose their jobs overnight. We’re not in 2008—at least not yet.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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