America’s next recession

A weakened market may be followed by a painfully prolonged recovery.

The American economy will face a crisis in the near future. Big banks, prominent economists, and former officials are all saying that a downturn is a near certainty as the Federal Reserve wrestles inflation under control. Three-quarters of chief executives of Fortune 500 companies are braced for growth to go negative before the end of 2023. Bond yields and consumer surveys are flashing red. Google searches for “recession” are soaring.

The track record of the US economy certainly provides cause for concern. As Larry Summers, a former Treasury secretary, has observed, whenever inflation has risen above 4% and unemployment has dipped below 4% — two thresholds that, when breached, indicate economic overheating — America has suffered a recession within two years. The economy has already significantly passed both of these thresholds.

For much of last year, the Fed and investors alike believed that inflation would fade as the economy recovered. No one believes that now. There is broad agreement that, supply issues notwithstanding, demand also remains excessive, and that tighter monetary policy is needed to return it to a normal level. The question is how tight, and therefore how much the economy could suffer: the higher the Fed has to raise rates, the more painful the economic downturn…