A MARTINEZ, HOST:
Inflation is at its highest level in decades. Russia's invasion of Ukraine is choking off food and energy supplies, and the stock market is shedding value. Does all of this mean a recession is inevitable? David Wessel heads the Hutchins Center at the Brookings Institution. David, one definition of recession is two quarters in which the economy, measured by the GNP, shrinks. So is it possible we're already in one?
DAVID WESSEL: Good morning, A. It's possible, yes, but it's unlikely. The U.S. economy, the GDP - the value of all the goods and services we produce in the U.S. - did contract in the first three months of this year. And though we don't have the official numbers yet, some economic forecasters think the GDP shrank in the second three months of the year as well. But the official arbiters of recession, a committee of academic economists, doesn't use that definition. They define a recession as a significant decline in economic activity that is spread throughout the economy. And they usually pay particular attention to the job market. And what's interesting now is the job market continues to be very strong. The unemployment rate, 3.6%, is the lowest it's been in decades. The U.S. is adding 400,000 jobs a month for the past few months. And there are two vacant jobs posted for each person unemployed and looking for work. So that doesn't feel like we're in recession now.
MARTINEZ: So we should be focusing on the job market then?
WESSEL: Well, yes, that's one important place to look. Claudia Sahm, an economist, finds that over recent history, a recession almost always follows when the three-month moving average of unemployment rises by half a percentage point. That hasn't happened yet. And also to watch is what happens to the claims for new unemployment insurance, people who are newly filing, because we get that data every week. But outside of the job market, I think one place to look is what's happening to consumer spending. Americans have been spending a lot, in part because so many of them have jobs, some of them are getting raises, and in part because they saved a lot of money during the pandemic. But that may be beginning to wane. For instance, Target, that big retailer, recently warned that profits are going to fall because it needs to cancel orders and offer discounts 'cause it has so many unsold goods on its shelves, a sign that maybe consumer demand is waning.
MARTINEZ: But, David, I always hear that, you know, if you've got inflation, that means recession is coming. So what's the connection?
WESSEL: Well, what - why do we have inflation? Well, the major reason we have inflation is that demand in the economy is rising faster than the economy's capacity to supply goods and services and workers. And the Federal Reserve is raising interest rates now to make borrowing more costly to discourage spending. It wants to slow demand. Jay Powell, the Fed chair, says he doesn't want a recession, but he's made clear that he's willing to take one if that's what's necessary to bring inflation back down towards his 2% target. So here's the thing. The quicker inflation comes down, for whatever reason - oil prices falling or supply chains resolving or whatever - the sooner the Fed will stop raising interest rates. So one thing to watch is the pace of price increases. If inflation comes down significantly in the next several months, then the Fed may relax, take a break from raising interest rates, and that will reduce the risk that we're going to have a recession in 2023 or 2024.
MARTINEZ: Another thing, though - to what extent does what happens outside of the U.S. determine whether we are in a recession?
WESSEL: Well, quite a bit. We still consume most of what we produce in the U.S., and we still make most of what we consume. But we do export a lot. So demand from abroad matters, and demand for Europe in particular is weakening sharply, partly because of rising energy costs there. And, of course, Americans have less money to spend on other things because the price of oil and food has gone up so much recently because of the Russian invasion of Ukraine. And then there's what's going on in China. China's an ever-bigger part of the global economy, so the COVID lockdowns there - shuttered factories, consumers who don't go shopping and buy iPhones or whatever - is affecting the U.S. economy. So if the U.S. economy begins to weaken because the Fed is raising interest rates and consumers are spending less, then foreign - falloff in foreign demand can make that even worse.
MARTINEZ: That's David Wessel at the Brookings Institution. David, thanks for the info.
WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.