A Downturn Ahead for the U.S. Economy?

Americans are increasingly worried about the economy, with 6 in 10 people concerned that a major recession is "right around the corner", according to survey from AllianzLife. The reasons for their anxiety are clear; Economic activity shrank during the first three months of the year, inflation is at 40-years high, the GDP has dropped by 1.4% and the stock market is sliding as well.

Despite all these signals, most Wall Street economists do not expect a recession this year. More likely, they say, is a "hard landing" in 2023 linked to the Federal Reserve's move to hike interest rates.

Although economists don't predict a slump in the current year, still businesses and consumers are battling several headwinds that are hitting their pocketbooks. For instance, worker wages are rising, but inflation is gobbling up those gains, putting household budgets in red.

Meanwhile, the Fed is raising interest rates to cool down inflation. The central bank's strategy; Boost borrowing costs in order to tamp down the demand from consumers and businesses doesn't seem to work as well.

Regardless of all the problems, Americans are continuing to open their wallets, providing key support for economy that relies heavily on their spendings.

WHY DID THE ECONOMY SHRINK THIS YEAR?

The main factors behind the first-quarter down turn; a sharp drop in U.S. exports, slower restocking of goods in stores and warehouses, and decreased spending by local, state and federal governments. There is an atmosphere of uncertainty all around the country.

Economists expect second quarter GDP - the period running from April to June - to increase 2.9%, according to Factset. For 2022, economists expect growth to increase by 3.3%

RISK OF RECESSION IN 2022

Most economists say the odds of a recession are low during the current year given the underlying strength of U.S. economy. Consumers are spending, businesses are hiring and wages are growing. The labor market also remains in good shape. Credit rating agency Fitch forecasts that the U.S. will have recovered all the jobs lost during the COVID-19 pandemic by the third quarter of 2022.

Elon Musk, the CEO of Tesla and Spacex, talked about the economy of the U.S. on the All-in podcast published Monday.

Commenting on whether the U.S economy is in recession, Musk said:

"We probably are in a recession and that recession will get worse but these things pass and there will be boom times again ... It'll probably be some tough going for, i don't know, a year, maybe 12 to 18 months."

He added that 12-18 months is roughly the amount of time for a correction to happen. Recession fears have escalated recently as the Federal Reserve tightens the monetary policy help cool down inflation.

Musk explained that in his opinion, recessions are not necessarily a bad thing, emphasizing that he's been through a few of them during his time at public companies. "What tends to happen is, if you have a boom that goes on for too long, you get misallocation of capital — it starts raining money on fools, basically", he described.

WHAT ABOUT NEXT YEAR

Most economists say that the risks of recession are higher in 2023, especially if the Fed's interest rate hikes snuff out demand from consumers and businesses or if it's strategy fails to temper inflation. Their consensus forecast for 2023 is that GDP will grow by 2.3%, according to FactSet.

But the fact is; People should be ready to face any unwanted circumstances in case the situation gets worse. You never know what's coming your way. So make sure that you're well prepared as it might be a bumpy ride.