Will we get a recession or not? Ask two ecౠonomic forecasters, and you’ll likely get two wildly different answers. 

Earlier this month, The Wall Street Journal surveyed a group of economic forecasters and asked them what they think the chances are that the economy will sink into a recession in the next 12 months, or is already in one. On average, the 61 economists and analysts said there is a 54% chance of a recession, down from 61% when the group was polled in April.

Whether or not the economy goes into a recession—a widespread economic downturn—will affect pretty much everyone’s finances in one way or another. Recessions, such as the one that followed the 澳洲幸运5官方开奖结果体彩网:Great Financial Crisis in 2008, typically 澳洲幸运5官方开奖结果体彩网:mean millions of jobs lost, business slowing down, and the nation’s standard of living generally in decline.

With so much at stake, and 🔯witꦅh a plethora of data to work with, economists are still very divided on whether recession storm clouds are truly on the horizon. 

Some of those polled by the Journal rated recession chances close to 50-50, while others were nearly certain a recession would take place, and still others extreme🍸ly confident that we’ll 🎃avoid one. 

Investopedia spoke with two economists on opposite sides: Robert Fry, founder of Robert Fry Economics, who rated the chance of a recession at 90%, and Christopher Thornberg, founding partner at Beacon Economics, who said there was just a 5% chance of a recession.

The Case For a Recession

One of the main reasons economists, Fry included, expect a recession is an 澳洲幸运5官方开奖结果体彩网:indicator called the yield curve, which tracks the difference in yields between long-term and short-term bonds. When the economy is healthy, long-term bonds have higher yields, and when investors fear a recession sometime soon, short-term bonds are on top instead, a condition called an “inverted yield curve.”

An inverted yield curve reflects market expectations that the Federal Reserve will soꦍon have to cut its benchmark interest rate to stimulate the economy with cheap money to correct an economic downturn. That, Fry said, can influence the decision making of individuals and businesses who are considering major purchases.

“If you have an inverted yield curve, that means people in the market expect interest rates to go down,” Fry said. “If you expect interest rates to go down, and you're thinking of borrowing to buy a house or to invest in a plant and equipment, what do you do? You wait for them to go down.”

Fry puts a lot of stock in the yield curve because it’s historically been a reliable indicator of a recession. In the past, when the yield curve inverted, a recession 澳洲幸运5官方开奖结果体彩网:has followed within a year or two, and it’s been upside-down since last July. 

There are more concrete reasons to expect a recession as well. Ever since March 2022, the Fed has battled elevated inflation by raising its benchmark interest rates 🏅꧅5 percentage points from near-zero, increasing borrowing costs on all kinds of loans and puಌtting financial pressure on households and businesses.🌟

Federal student 澳洲幸运5官方开奖结果体彩网:loan payments are set to resume in Octob🍌🔥er, further straining people’s budgets and 澳洲幸运5官方开奖结果体彩网:stifling the consumer spending that🧸 is the main engine of eco🥃nomic growth. 

Furthermore, Americans are still grappling with the effects of inflation over the last two years, which rapidly raised prices for groceries, rent, and other necessities of life. While increases have 澳洲幸运5官方开奖结果体彩网:slowe🍷d significantly since their peak in June of 2022, prices for most things haven’t actually fallen, leaving people to deal with elevated bills.

Indeed, consumers have been ﷽澳洲幸运5官方开奖结果体彩网:spending down the savings they accumulated during the pandemic, and may be forced to cut back once that stockpile is exhausted.

Another warning sign of a recession: the Leading Economic Index, a measure that combines industrial output, employment, the stock market, and other data to signal the direction of the economy. The measure fell in June and has been warning of an impending recession for more than a year, according to the Conference Board, the nonprofit economics think tank that creates the index.

“The race is not always to the swift nor the battle to the strong, but that's the way to bet,” Fry said. “Maybe the yield curve is going to be wrong this time. And maybe we're going to get 15 consecutive months of falling leading indicators and we aren't going to get a recession. But I'm not going to bet against them.”

The Case Against

Thornberg is absolutely going to bet against them.

“There’s no reason to have a recession,” he said.

To Thornberg and other recession optimists, the yield curve inverting doesn’t mean a recession is inevitable. The curve typically inverts when the Fed is raising interest rates in response to an imbalance in the economy, such as in 2006, when the Fed raised rates in a belated effort to cool the overheating housing market, Thornberg noted.

“The inverted yield curveﷺ is like skid marks at the edge of a cliff,”ꦆ he said. “The Federal Reserve tried to put  on the brakes, but it was way too late.”

In today’s situation, the Fed is trying to cool inflation arising from an imbalance in supply and demand stemming from the pandemic, when trillions of dollars from both government 澳洲幸运5官方开奖结果体彩网:pandemic relief programs, and the Fed’s 澳洲幸运5官方开奖结果体彩网:quantitative easing ran headlong into supply chain disruptions. It was a textbook case of “too much money chasing too few goods,” Thornberg said.

To Thornberg, the idea of a recession is hard to square with sold-out concerts, packed restaurants, busy hotels and airports, and overall booming consumer spending. Restaurant spending in June was up 30% since February 2020, before the pandemic hit, and overall retail sales are up 32% over the same period, according to the Census Bureau.

“People are partying and pushing prices up. That's it,” he said. “Eventually, we’ll run out of money and consumer demand will slow down and we'll get back to normal and things will be fine.”

Another reason for optimism in Thornberg’s book: the hot labor market. Employees have been in high demand, keeping the unemployment rate near record lows, and pushing wages up as businesses compete for talent, by some measures, more than keeping up with inflation. In May, hourly wages were up 6% year-over-year, according to the Federal Reserve Bank of Atlanta's wage growth tracker, versus a 3.8% yearly jump in consumer prices as measured by PCE inflation.

To Thornberg, the economy’s strong points far outweigh its weak areas, such as the office real estate market, which is 澳洲幸运5官方开奖结果体彩网:seeing prices plunge because of enduring work-from-home trends.

💛 “The economy is fine,” Thornberg said. “The points of stress are relatively small. Yes, office is a mess. I get💟 that. But office isn't big enough to be systemic.”

Optimists are Gaining Ground

Taken as a whole, economic predictions, which were pessimistic earlier in the year, have trended toward the no-recession camp as recent reports have shown 澳洲幸运5官方开奖结果体彩网:cooling inflation, steady 澳洲幸运5官方开奖结果体彩网:hiring by employers, and consumers 澳洲幸运5官方开奖结果体彩网:growing more optimistic about their own finances and the economy. 

Fry said t🥃here is a small but growing possibility that the Fed’s anti-inflation campaign could successfully cool the economy without slowing it so much that the economy is pushed into recession—a so-called hard landing. Indeed, when CNBC polled him about recession chances this week, he reduced his recession chances to 80% from 90%.

“I admit there is a chance they could pull off a soft landing,” he said.