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By Kristin Myers, Editor-in-Chief

ICYMI: A Recession Could Be Coming by 2023

In case you missed it, there are a few warning signs that indicate the U.S. economy is headed for a recession (a period of broad economic decline) by the end of next year. According to Harvard University economists Lawrence Summers, a former Treasury secretary, and Alex Domash, history tells us that it could happen by the end of next year. Since 1955, every time the average quarterly wage inflation rate was above 5% and the average quarterly unemployment rate was below 5%, a recession happened within two years.

There are other indicators that tell us a recession is likely coming. The yield on short-term government bonds rose higher than the yield on long-term bonds earlier this week, resulting in what is called an inverted yield curve. Inverted yield curves are reliable indicators that a recession is coming. But why?

When an investor buys Treasurys (like bonds), they are giving the government an IOU with the promise that their money will be paid back (with interest). The yield is the total return that an investor can expect from a bond. Typically, yields are higher on longer term bonds (like 10- or 30-year) because an investor is taking on greater risk by loaning out their money for such a long period of time. But when the yield curve becomes inverted, yields on short-term bonds are higher than long-term bonds because investors forecast that it's a greater risk to loan out their money for a shorter term compared to the longer term.

Recessions can cause a lot of financial hardship on households, and it can take people a long time to recover. Unemployment often goes up, wages usually go down, and borrowing money typically gets harder. There was a brief recession in 2020 when the COVID-19 pandemic hit (from which the economy quickly recovered), but more well-known is the Great Recession between 2007 and 2009. It took the U.S. years to recover—nearly a decade passed before household income bounced back and unemployment rates fell to pre-recession levels.

- Kristin

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Off the Charts

If the current pace of growth continues, it will be just four months before the U.S. has regained all 22 million jobs it lost in the pandemic. Restoring the remaining 1.6 million jobs would close the books on what economists say has been a remarkably fast recovery.