In spring two years ago, the coronavirus pandemic threw the U.S. economy into recession. Last spring, the proliferation of vaccines swung it into a rapid expansion.
This spring, speculation abounds that another recession is around the corner, maybe late this year or next year.
With official data expected later this month, the U.S. economy likely grew between 1 and 2% in the first three months of the year. But last year's snapback produced a faster drop in unemployment and bigger spike in inflation than nearly everyone expected. And balancing that out could require some bitter medicine: higher interest rates.
"The debate over the necessity of more rapid interest rate hikes, and the associated debate over whether that will push the economy into a recession, parallels, with a little bit of a lag, the acceleration in inflation rates," said V. V. Chari, an economist at the University of Minnesota.
Recession chatter dominated economists' analysis of new inflation data released last week. Consumer prices rose 8.5% in March, likely the peak in a series of increases that started last April out of the 2% range targeted by policymakers at the Federal Reserve.
But worries about recession also bubbled up in the immediate days after Russia's invasion of Ukraine in February, with speculation centering on the effect of constrained energy and food supplies.
And with the balance of power in Congress at stake in the November election, political candidates — and the spin doctors and media around them — will be handicapping the possibility of recession and pointing fingers over it for months to come.
Here's a look at some of the key questions and influences in the recession debate:
What's a recession and how often does it happen?
Economies grow upward most of the time. But they're occasionally interrupted by a downturn, usually because excesses happen and a reset is needed. Recession is defined as at least two consecutive three-month periods of decline.
Such slowdowns thrust painful change onto businesses, institutions and governments. More layoffs tend to happen. New goods, services and capital spending are delayed or canceled. And even after recessions end, their effects linger as consumers and businesses stay reluctant about taking risks.
Since the nation's start, there have been 19 recessions, with the longest being the Great Depression of the 1930s and the shortest in 2020. Before the pandemic, the U.S. experienced its longest period without a recession since the first half of the 19th century.
Whenever recession comes, Minnesota's economy will also tumble. The state fared better — falling less and recovering more quickly — than the U.S. in the 2001 and 2008 recessions. However, it fell further than the U.S. in the 2020 downturn, then recovered in line with the nation last year.
Why is inflation being talked about so much in conjunction with recession now?
Inflation, the upward pressure on prices, slows down an economy if it persists at a high rate for a relatively long time. Demand for goods and services gets choked by high prices, leading to declines in the production of goods and then to cuts in jobs.
But inflation broke out of its target range just a year ago, not long enough to slow the economy. Instead, the issue is whether it can be tamed without recession, a feat called a "soft landing." One of the only ways to control inflation is for central banks to raise interest rates, which slows economic activity by making it more expensive to borrow money.
Many central banks, including the U.S. Federal Reserve, try to keep both inflation and unemployment low. That's difficult because inflation is brought down by raising rates but unemployment is brought down by lowering rates.
While inflation is high right now, the nation's unemployment rate is low. At 3.6% last month, it was just a notch above where it was before the pandemic hit. That makes the environment ripe for rate hikes.
Most developed countries are experiencing similar conditions, and central bankers around the world are debating the pace of rate hikes. Last week, central banks in Canada and New Zealand raised their interest rates a half-percent.
The Fed lifted its key rate by one-quarter percent last month, its first move upward after trimming the rate to zero in the pandemic. Many economists and investors expect a half-percent increase at its next meeting in early May.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, wrote in an essay after the March rate hike that more data are needed to determine the speed and size of rate hikes. "Over the course of this year ... we will get information to help us determine how much further we may need to go," he wrote.
Chari, who is also an adviser to the Minneapolis Fed, said he'll be watching for the release of the minutes from the May meeting of the Fed's rate-setting Open Market Committee. He expects some Fed officials to signal willingness for more aggressive hikes, perhaps a full percentage point in one move.
"If a lot are pushing for a more aggressive move, that oddly enough might get us to the soft landing and inflation falling on its own," Chari said. "That will have the effect of saying 'We're very serious about controlling inflation.'"
Has there been a moment like this in the economic history of the U.S.?
Many people point to the early 1980s, the last time the U.S. experienced inflation above 6%. But that was the end of a 10-year stretch in which inflation never fell below 5.8% and exceeded 10% in four of those years. The Fed pushed its key interest rate to 20% to cool inflation. That move technically led to two recessions stretching from early 1980 to the end of 1982.
The situation that more closely resembles the current one was in 1948. With the economy roaring along in the post-World War II recovery, inflation was around 8% and the Fed raised interest rates. Historians and economists now view that it moved too quickly. A recession began late that year, the economy shrank in three of the four quarters of 1949 and unemployment shot up to nearly 8%.
What are the arguments against higher interest rates leading to recession?
One is that interest rates are starting from such a low base that, even if they rise by several percentage points, consumers and businesses can easily absorb them.
Another is that the goods most sensitive to the cost of borrowing — such as houses and cars — are in such high demand and short supply that it will take a long time for consumers to be steered away from them by higher interest rates.
In February, new housing starts in the U.S. were at the highest level since mid-2006. There have only been about 5,000 houses for sale in the Twin Cities at any time this year, down from 10,000 in 2020.
Car dealers are still waiting for manufacturers to catch up after parts shortages crimped production last year. Inventories on car lots remain extremely low, though a handful of manufacturers are starting to advertise finance specials, a comeback sign.
Who's to blame if recession comes?
If a recession happens in the next year or so, the reasons will be more numerous and complicated than just whether or not the Federal Reserve got the timing and pace of rate hikes correct.
The shrunken American workforce is one drag on the economy, for example. The ongoing exit of baby boomers from the workplace, immigration restrictions that emerged during the Trump administration and ongoing anxiety about COVID-19 have all reduced labor participation — visible in the high number of job vacancies in Minnesota and elsewhere.
The war in Ukraine will remain a variable for months to come, though the surge in oil and gas prices that occurred at its outset has retreated.
Much of the debate in political circles is whether the federal government's American Rescue Plan, passed early last year and initially viewed as an early success of the Biden administration, turned out to be one stimulus package too many coming out of the pandemic. The $1.9 trillion package followed more than $3 trillion in government aid in 2020.
Chari sees a different economic question waiting to be answered. During the entire long expansion after the 2008-09 recession, interest rates never got up back up to the 5 to 6% levels they were in the mid-2000s. And yet, throughout the 2010s, inflation stayed low.
That's a reversal from the long-held belief that, when inflation threatens to rise, interest rates should be lifted higher than the expected inflation rate. "Has the way the economy works changed so fundamentally that the old rules no longer apply?" Chari asked.
"Many policymakers subscribe to the view that the world changed," he said. "An increasing number of economists think, no, we're going back to the way things were. What happens in the next year or two will tell us who is right."