YouTube: https://youtu.be/GsWqimCynF8
As many fear a US recession looms on the horizon, economists search the past and previous downturns for guidance on the economy's performance going forward and whether such recession actually will occur.
Some economists foresee a future like that following the 2008 financial crisis with depressed demand and falling prices that required the Federal Reserve lower interest rates to near zero. Others predict an outcome like that which occurred in the 1970's when supply-shocks and inflation resulted in a period of both lower growth and higher prices – 'stagflation.'
However, for some economists, a 1993 Federal Reserve paper analyzing the recession of the early 1990's provides the most meaningful prediction. The paper notes three primary factors contributing to the 1990's recession which appear today, in slightly different form – consumer pessimism, spiking oil prices resulting from the invasion of Kuwait by Iraq, and the Federal Reserve's attempt to curtail inflation by raising interest rates.
Pessimistic consumers. Declining consumer sentiment contributed to declining product demand which helped usher in the 1990's downturn. Today, consumer sentiment, measured by a longstanding index monitored by the University of Michigan, shows the economic mood of consumers the lowest since 2011.
Rising energy prices. The invasion of Kuwait by Iraq in 1990 upended oil-market equilibrium with higher oil prices having widespread economic effect. Shipping and transportation costs rose with subsequent product price increases diminishing consumer demand. Consumers travelled less and reduced expenditures also with a dampening economic effect. And oil-dependent manufacturing processes began to slump. These together helped hasten a recession. Today, Russia's Ukraine invasion similarly roils energy markets though prices for some products have eased from their mid-March high.
Federal Reserve Policy. From 1988 to 1989 the Federal Reserve substantially increased interest rates attempting to curtail inflation which was reaching levels only seen in the 1970's. Increasing interest rates raised costs of both investment and consumption which decreased as a result. This weakened the economy and, with factors above, helped set the stage for a recession. Today, as inflation reaches levels not seen since the early 1980's, the Federal Reserve signals a similar intent to aggressively raise interest rates. Some fear overly aggressive action may halt economic growth which already shows signs of weakening.
Despite these parallels, some economists note the 1990's economy generally was weaker than today's. Job openings still outpace available workers and wage growth correspondingly is strong. Accordingly, Jerome Powell, the chair of the Federal Reserve, in a recent statement indicated he believes restrictive monetary policy and rising interest rates will not impair the economy's ability to flourish.
