Downtime

A recession in the United States is “certainly a possibility,” in the typically measured words of Federal Reserve Board Chair Jay Powell—speaking to the U.S. Congress on June 22, as evidence mounted that the country’s economic problems were getting worse than they’ve been in decades. Last month, inflation hit 8.6 percent, the most significant year-to-year increase in 40 years. The price of gasoline is now between $5 to $7 a gallon, depending on the state—an unprecedented rate in a country where millions drive long distances to work—while the costs of food and other basics are also rising steeply. Most Americans’ confidence in President Joe Biden’s ability to manage the economy is dropping, as the chances of widely expected losses for his Democratic Party in the November midterm elections are increasing. To counter inflation, the U.S. central bank, the Federal Reserve, raised its main interest rate on June 15 by 0.75 percent, the biggest hike in nearly 30 years. Average prices on the U.S. stock market, meanwhile, dropped by 20 percent this month from their most recent peak, the sharpest decline since the Great Recession of 2008-2009. What’s next?

Claudia Sahm is an economist who worked at the U.S. Federal Reserve from 2007 to 2019, including as the section chief for its Board of Governors, and was a senior economist on President Barack Obama’s Council of Economic Advisors. In Sahm’s view, a dire outlook on the American economy is understandable right now, because the financial struggles Americans are experiencing, with costs and interest rates climbing, are real and acute. Still, Sahm says, a broader view of the economy offers positive signs too, especially in the job market. The next few months could realistically play out in a number of scenarios—and while some are grim, others range to the hopeful. As the Federal Reserve attempts to cool inflation, its policies could wind up either causing Americans minimal pain or plunging the country into a severe recession. Avoiding the worst of the scenarios, Sahm says, will require some success in further containing the coronavirus, limiting the economic harm of Russia’s invasion of Ukraine, and addressing remaining challenges in the world’s supply chains. For now, though, unpredictability on all these fronts will continue to mean uncertainty for the economy.

Michael Bluhm: What’s happening in the U.S. economy right now?

Claudia Sahm: Since Covid caused a severe global recession in 2020, the past two-and-a-half years have been one economic crisis after another. Recessions hit everyone—a recession means that a country’s entire economy goes into a downturn. Nearly everyone gets hurt financially. The industries hit hardest often take more time to recover; it often takes people longer to get jobs back in them.

The recovery from the Covid recession is halfway done. The U.S. unemployment rate is near a 50-year low—it recovered very quickly. After previous recessions, we’ve had what are called jobless recoveries, where it took a long time to get people back to work. But that wasn’t the case this time. Now we have inflation, though, with prices rising at a worrying pace—creating hardship and a lot of uncertainty—and even the smartest economists don’t know what will happen with it.

It’s not uncommon in a recovery to see this confusing mix of good and bad, but everything in the Covid crisis has been amplified in a way not seen in generations.

Bluhm: Many, if not most, economists predicted last year that inflation would be temporary—or, in economic terms, transitory. But it’s only gotten worse this year. What happened there?

Sahm: Inflation was not transitory. I was part of “Team Transitory”; I thought inflation was going to come down. And at this time last year, month-over-month inflation was coming down. But Covid was not transitory. The Delta variant came, and then the Omicron variant came. And on top of that, now we have a war in Europe. But fundamentally, Covid not being transitory is why inflation was not transitory.