Have You Been Following the Debt Ceiling Debate?
President Joe Biden and House Speaker Kevin McCarthy met on May 22 to discuss raising the statutory limit on U.S. government debt, generally called the debt ceiling. There was not resolution although both termed the discussion “productive,”, and their respective negotiating teams continued discussions.1 Here are some answers to questions you may have about the issues behind the current impasse.
What is the debt ceiling? The debt ceiling is a statutory limit on cumulative U.S. government debt, which is the sum of annual deficits since 1835 — the only time the U.S. government had no debt — plus interest owed to investors who purchased Treasury securities issued to finance the debt.2 It limits the amount that the government can borrow to meet financial obligations already authorized by Congress. It does not authorize future spending. However, raising the debt ceiling has been used in recent years as leverage to negotiate on the federal budget.
Why do we have a debt ceiling? A debt ceiling was first introduced in 1917 to make it easier for the federal government to borrow during World War I. Before that time, all borrowing had to be authorized by Congress in extremely specific terms, which made it difficult to respond to changing needs. The modern debt ceiling, which aggregates almost all federal debt under one limit, was established in 1939 and has generally been used as a flexible structure to encourage fiscal responsibility.3 Since 1960, the ceiling has been raised, modified, or suspended 78 times, mostly with little fanfare until a political battle in 2011.4
How much is the debt ceiling? The current limit was set by Congress at about $31.4 trillion in December 2021.5 The debt was less than $6 trillion in 2001, when it began to rise due to tax cuts and increased military and national security spending in response to 9/11. It has tripled since 2008, driven by reduced tax revenues and stimulus spending during the Great Recession and the COVID-19 pandemic.6
When will we reach the debt ceiling? The government reached the $31.4 trillion limit on January 19, 2023. Since then, the Treasury has been using short-term accounting tactics (called “extraordinary measures”) to allow spending for a limited period without raising the ceiling.7 According to Treasury Secretary Janet Yellen, this extension is expected to expire on or shortly after June 1, 2023.8 The so-called “X-date” could vary because tax revenues are not fully predictable. It has come more quickly than anticipated, due to postponement of the tax-filing deadline for disaster-area taxpayers in certain states and lower capital gains tax receipts.9
What will happen if the ceiling is not increased? The U.S. government will not be able to pay all its financial obligations. This has never happened, so it is difficult to predict exactly how it would play out. The Treasury could still pay some of its obligations from incoming revenues, but there would have to be choices regarding what bills would not be paid. These are some of the possible results.
- The government could default on its bond payments. U.S. Treasury securities are generally considered among the safest investments in the world because they are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. These securities are widely held by individual and institutional investors as well as local, state, and foreign governments. Even the possibility of defaulting on interest payments could disrupt global markets, and an extended default could have serious economic repercussions around the world. An estimate by Moody’s Analytics suggests that a one-week default could send the U.S. economy into a mild recession with the loss of 1.5 million jobs and real GDP contraction of 0.7 percentage point. A default through the end of July (which seems highly unlikely) could cause a deep recession with 7.8 million lost jobs and a real GDP decline of 4.6%. Any default, or even near-default, could result in downgrading the U.S. credit rating, as occurred in 2011. This would make borrowing more expensive, adding to the ongoing problem.10
- Government payments could be delayed. Social Security and Veterans benefit payments could be delayed, causing hardship to those who depend on them for immediate needs. The same is true for wages of U.S. government workers, and overdue payments to government contractors could mean they may not be able to pay their employees. Late reimbursements to Medicare providers could strain smaller hospitals and medical practices. Any past due payments would be made once the debt ceiling is raised, but the short-term consequences could be painful.
What are the issues in the negotiations? Public statements from negotiators indicate the key issues include caps on future spending, use of unspent COVID-relief funds, work requirements for certain social programs, and expediting rules for energy projects. Both sides have agreed to spending caps in general terms, but they differ on how caps should be structured. The 2011 debt ceiling impasse resulted in spending caps, which had mixed results over the long term.11 Any caps would only affect discretionary spending, accounts for just 28% of federal spending. Defense spending is almost half of that amount. The rest is mandatory spending, including Social Security and Medicare (which will account for nearly 35% of federal spending in 2023) and interest on the national debt.12
Will there be a resolution? It is impossible to know for sure, but both sides have clearly stated that they will not allow the U.S. government to default on its obligations. However, time is growing short, and any agreement must pass in both the House and the Senate, requiring at least some bipartisan support. Speaker McCarthy has said that an agreement must be reached early enough to give House lawmakers a required 72-hour period to review the legislation before the June 1 deadline.13 If an agreement is not reached by that time, a temporary measure could suspend or raise the ceiling for a limited period to provide more time for negotiations.
Should investors worry? Although a default could have serious market repercussions, the most likely scenario is that the ceiling will be suspended or raised close to the deadline. If so, any related market volatility is likely to be temporary.14 While the U.S. debt is a significant issue, your investment strategy should be based on your long-term goals and risk tolerance, and it’s generally wise to stay the course through political conflicts.
The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Forecasts are based on current conditions, are subject to change, and may not happen.
1, 11, 13) The New York Times, May 22, 2023
2, 4, 6, 8) U.S. Treasury, 2023
3) Bipartisan Policy Center, 2023
5, 7, 12) Congressional Budget Office, February 2023
9-10, 14) Moody’s Analytics, May 2023
Ceiling and Deficit Spending
The U.S. government reached its statutory limit, commonly called the debt ceiling, January 19,2023. The current limit was set by Congress at about $31.4 trillion in December 2021.1
Janet Yellen, Treasury Secretary, started well-established “extraordinary measures” to allow necessary borrowing for a limited period the same day. While Yellen projects the extension will last until early June, the Congressional Budget Office (CBO) estimates it may last until sometime between July and September. However, the CBO cautions that if April tax revenues fall short of its projections, the Treasury could run out of funds earlier.2–3
Flexibility vs. Fiscal Fights
A debt ceiling was first established in 1917 to give the federal government more flexibility to borrow during World War I. Previously, all borrowing had to be authorized by Congress in very specific terms, which made it difficult for the government to respond to changing needs.4
The modern debt ceiling, which aggregates almost all government debt under one limit, was established in 1939. Since 1960, it has been raised, modified, or suspended 78 times, mostly with little fanfare. That changed in 2011, when a political battle over the ceiling pushed the Treasury so close to the edge that Standard & Poor’s downgraded the credit rating of the U.S. government.5–6
The debt ceiling limits the amount that the U.S. Treasury can borrow to meet financial obligations already authorized by Congress. It does not authorize future spending. However, beginning with the bitter battle of 2011, it has been used as leverage for partisan negotiations over government spending. With the White House and the House of Representatives — which must authorize spending — held by different parties, this year’s negotiations could be particularly difficult.
Potential Consequences
If the debt ceiling is not raised in a timely manner, the U.S. government could default on its financial obligations, resulting in unpaid bills, higher interest rates, and a loss of faith in U.S. government securities that would reverberate throughout the global economy. While it’s unlikely that the current situation will lead to a default, pushing negotiations close to the edge can be damaging in itself. It was estimated that the 2011 impasse cost U.S. taxpayers $1.3 billion in increased borrowing costs in FY 2011 with additional costs in the following years.7
The Deficit and the Debt
The federal government runs at a deficit when tax revenues are not sufficient to meet spending obligations. Federal spending has outpaced revenue for the last 50 years, except from 1998 to 2001.8 Annual budget deficits add to the national debt.
The current debt of $31.4 trillion is the highest in U.S. history.9 Measuring the debt as a percentage of gross domestic product (GDP) is a better comparison over time. Economists look at debt held by the public — funds the government has borrowed to meet operational expenses and liabilities, primarily through issuing Treasury securities. Interagency debt — funds borrowed from government accounts such as the Social Security trust funds — is also subject to the limit but does not directly affect the economy or federal budget.
At the end of fiscal year 2022 (September 30, 2022), debt held by the public was equivalent to 97% of GDP. In 2019, before the pandemic, it was 79% of GDP, and in 2007, before the Great Recession, it was 35%. Both crises caused a significant increase of the deficit and debt due to lower tax revenues and high spending on government stimulus programs. The last time the debt exceeded current levels was at the end of World War II.10-11
A February 2023 analysis, the CBO projected that the debt will rise steadily over the next decade to 118% of GDP in 2033, which would be the highest percentage in U.S. history. The driving forces behind this increase would be higher spending on Social Security and Medicare, and rising interest costs (due to increasing debt and higher rates). If current laws remain unchanged, the debt is projected to rise even more quickly in the next two decades, reaching 195% of GDP in 2053.12
No Easy Answer
The only way to change this trajectory is to increase revenue, reduce spending, or both. The best scenario would be decades of high GDP growth that increases revenue at current tax rates, but this seems unlikely. The CBO projects real (inflation-adjusted) GDP growth to average a tepid 1.7% annually over the next decade.13 Raising tax rates may be necessary, but that is always a difficult political option.
There is little room to maneuver on the spending side. Only 28% of federal spending is “discretionary,” meaning Congress can set amounts through annual appropriations bills, and almost half of that spending goes to national defense, which few leaders would want to cut in the current global climate. The rest is mandatory spending, including Social Security and Medicare (which will account for nearly 36% of federal spending in 2023) and interest on the national debt.14 While both parties have indicated that Social Security and Medicare are off the table, other mandatory spending could be reduced through Congressional action.
The White House is expected to release its budget proposal for FY 2024 this month, followed by a counterproposal from House Republicans in April, setting up what is sure to be an intense period of budget negotiations. President Biden and House Speaker Kevin McCarthy have already begun to discuss the debt ceiling issue, and it remains to be seen whether the ceiling can be addressed outside of the budget process or whether it will be caught in the crosshairs. In either case, the ceiling will have to be raised or suspended in order to maintain U.S. government operations.
U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Forecasts are based on current conditions, are subject to change, and may not come to pass.
1, 3, 10, 12–14) Congressional Budget Office, 2023
2, 6, 9) U.S. Treasury, 2023
4–5) Bipartisan Policy Center, 2023
7) U.S. Government Accountability Office, July 23, 2012
8, 11) U.S. Office of Management and Budget, 2023
Is the Yield Curve Signaling a Recession?
Long-term bonds generally provide higher yields than short-term bonds because investors demand higher returns to compensate for the risk of lending money over a longer period. Occasionally, however, this relationship flips, and investors are willing to accept lower yields in return for the relative safety of longer-term bonds. This is called a yield curve inversion because a graph showing bond yields in relation to maturity is essentially turned upside down (see chart).
A yield curve could apply to any bonds that carry similar risk, but the most studied curve is for U.S. Treasury securities, and the most common focal point is the relationship between the two-year and 10-year Treasury notes. The two-year yield has been higher than the 10-year yield since July 2022, and beginning in late November, the difference has been at levels not seen since 1981. The biggest separation in 2022 came on December 7, when the two-year was 4.26% and the 10-year was 3.42%, a difference of 0.84%. Other short-term Treasuries have also offered higher yields; the highest yields in early 2023 were for the six-month and one-year Treasury bills.1 (Although Treasuries are often referred to as bonds, maturities up to one year are bills, while maturities of two to 10 years are notes. Only 20- and 30-year Treasuries are officially called bonds.)
Predicting Recessions
An inversion of the two-year and 10-year Treasury notes has preceded each recession over the past 50 years, reliably predicting a recession within the next one to two years.2 A 2018 Federal Reserve study suggested that an inversion of the three-month and 10-year Treasuries may be an even more reliable indicator, predicting a recession within about 12 months.3 The three-month and 10-year Treasuries have been inverted since late October, and in December and early January the difference was often greater than the inversion of the two- and 10-year notes.4
Weakness or Inflation Control?
Yield curve inversions do not cause a recession; rather they indicate a shift in investor sentiment that may reflect underlying economic weakness. A normal yield curve suggests that investors believe the economy will continue to grow, and that interest rates are likely to rise with the growth. In this scenario, an investor typically would want a premium to tie up capital in long-term bonds and potentially miss out on other opportunities in the future.
Conversely, an inversion suggests that investors see economic challenges that are likely to push interest rates down and typically would rather invest in longer-term bonds at today’s yields. This increases demand for long-term bonds, driving prices up and yields down. (Bond prices and yields move in opposite directions; the more you pay for a bond that pays a given coupon interest rate, the lower the yield will be.)
The current situation is not so simple. The Federal Reserve has rapidly raised the benchmark federal funds rate to combat inflation, increasing it from near 0% in March 2022 to 4.25%–4.50% in December. As the rate for overnight loans within the Federal Reserve System, the funds rate directly affects other short-term rates, which is why yields on short-term Treasuries have increased so rapidly. The fact that 10-year Treasuries have lagged the increase in the funds rate may indeed mean that investors believe a recession is coming. But it could also reflect confidence that the Fed is winning the battle against inflation and will lower rates over the next few years. This is in line with the Fed’s projections, which see the funds rate peaking at 5.0%–5.25% by the end of 2023, and then dropping to 4.0%–4.25% in 2024 and 3.0%–3.25% in 2025.5
Inflation slowed somewhat in October and November, but there is a long way to go to reach the Fed’s target of 2% inflation for a healthy economy.6 The fundamental question remains the same as it has been since the Fed launched its aggressive rate increases: Will it require a recession to control inflation, or can it be controlled without shifting the economy into reverse?
Other Indicators and Forecasts
The yield curve is one of many indicators that economists consider when making economic projections. Among the most closely watched are the 10 leading economic indicators published by the Conference Board, with data on employment, interest rates, manufacturing, stock prices, housing, and consumer sentiment. The Leading Economic Index, which includes all 10 indicators, fell for nine consecutive months through November 2022, and Conference Board economists predict a recession beginning around the end of 2022 and lasting until mid-2023.7 Recessions are not officially declared by the National Bureau of Economic Research until they are underway, and the Conference Board view would suggest the United States may already be in a recession.
In The Wall Street Journal’s October 2022 Economic Forecasting Survey, most economists believed the United States would enter a recession within the next 12 months, with an average expectation of a relatively mild 8-month downturn.8 More recent surveys of economists for the Securities Industry and Financial Markets Association and Wolters Kluwer Blue Chip Economic Indicators also found a consensus for a mild recession in 2023.9–10
For now, the economy appears fairly strong despite high inflation, with a low November unemployment rate of 3.7% and an estimated 3.8% Q4 growth rate for real gross domestic product.11–12 Unfortunately, the indicators and surveys discussed above suggest an economic downturn in the next year or so. This would probably cause some job losses and other temporary financial hardship, but a brief recession may be the necessary price to tame inflation and put the U.S. economy on a more stable track for future growth.
U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Forecasts are based on current conditions, are subject to change, and may not happen.
1, 4) U.S. Treasury, 2023
2) Financial Times, December 7, 2022
3) Federal Reserve Bank of San Francisco, August 27, 2018
5) Federal Reserve, 2022
6, 11) U.S. Bureau of Labor Statistics, 2022
7) The Conference Board, December 22, 2022
8)The Wall Street Journal, October 16, 2022
9) SIFMA, December 2022
10) USA Today, December 15, 2022
12) Federal Reserve Bank of Atlanta, January 5, 2023
What Does a Strong Dollar Mean for the U.S. Economy?
In late September 2022, the U.S. dollar hit a 20-year high in an index that measures its value against six major currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. At the same time, a broader inflation-adjusted index that captures a basket of 26 foreign currencies reached its highest level since 1985. Both indexes eased slightly but remained near their highs in October.1–2
Intuitively, it might seem that a strong dollar is good for the U.S. economy, but the effects are mixed in the context of other domestic and global pressures.
World Standard
The U.S. dollar is the world’s reserve currency. About 40% of global financial transactions are executed in dollars, with or without U.S. involvement.3As such, foreign governments, global financial institutions, and multinational companies all hold dollars, providing a level of demand regardless of other forces.
Demand for the dollar tends to increase during difficult times as investors seek stability and security. Despite high inflation and recession predictions, the U.S. economy remains the strongest in the world.4 Other countries are battling inflation, too, and the strong dollar is making their battles more difficult. The United States recovered more quickly from the pandemic recession, putting it in a better position to weather inflationary pressures.
The Federal Reserve’s aggressive policy to combat inflation by raising interest rates has driven demand for the dollar even higher because of the appealing rates on dollar-denominated assets such as U.S. Treasury securities. Some other central banks have begun to raise rates as well — to fight inflation and offer better yields on their own securities. But the strength of the U.S. economy allows the Fed to push rates higher and faster, which is likely to maintain the dollar’s advantage for some time.
Exports and Imports
The strong dollar makes imported goods cheaper and exported goods more expensive. Cheaper imports are generally good for consumers and for companies that use foreign-manufactured supplies, but they can undercut domestic sales by U.S. producers.
At the same time, the strong dollar effectively raises prices for goods that U.S. companies sell in foreign markets, making it more difficult to compete and reducing the value of foreign purchases. For example, a U.S. company that sells 10,000 euros worth of goods to a foreign buyer would receive less revenue when a euro buys fewer dollars. Some experts are concerned that the strong dollar will dampen the post-pandemic rebound in U.S. manufacturing.5 More broadly, the ballooning trade deficit cuts into U.S. gross domestic product (GDP), which includes imports as a negative input and exports as a positive input.
Overseas Exposure
Generally, large multinational companies have the most exposure to risk from currency imbalances, and the stock market has shown signs of a shift from large companies — which have dominated the market since before the pandemic — to smaller companies that may be more nimble and less dependent on overseas sales. The S&P SmallCap 600 index has outperformed the S&P 500 index through late October; if the trend continues through the end of the year, it would be the first time since 2016 that small caps have eclipsed large caps.6 The S&P MidCap 400 index has done even better. In the current bear market, however, better performance means lower losses; all three indexes have had double-digit losses through October 2022.7
Global Pain
A weak currency can be a boon for a country by making its exports more competitive. But with the world economy weakening, other countries are not reaping those benefits, while paying more on debt and imported essentials such as food and fuel that are traded in dollars. The Fed is focused on domestic concerns, but it is effectively exporting inflation while trying to control it at home, and global economic pain could ultimately spread to the U.S. economy.8
Slowing the Dollar
In the near term, the Fed’s aggressive rate hikes may reduce domestic demand for foreign goods, reducing the trade deficit and weakening the dollar. The advance Q3 2022 GDP estimate showed the trade gap closing, but it’s unclear if the trend will last.9
In the longer term, as inflation eases in the United States, the Fed will likely take its foot off the gas pedal and ultimately bring rates down. This would allow other central banks to catch up if they choose to do so and would make foreign currencies and securities more appealing. Lower oil prices (denominated in dollars) and/or any reduction in world tensions — such as a slowdown in the Russia-Ukraine war — might also help reduce demand for dollars.
The dynamics of these factors are complex, and it may take time for any of them to unfold. In the meantime, the strong dollar is a sign of U.S. economic strength, and it would not be wise to place too much emphasis on it for long-term investment decisions. However, this could be a great time for an overseas vacation.
U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid.
All investments are subject to market volatility and loss of principal. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, and economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost. The value of a foreign investment, measured in U.S. dollars, could decrease because of unfavorable changes in currency exchange rates.
The S&P 500 index is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.
1) MarketWatch, October 19, 2022 (U.S. Dollar index)
2) Federal Reserve, 2022 (Real Broad Dollar index)
3, 8) The New York Times, September 26, 2022
4, 6) The Wall Street Journal, October 17, 2022
5) The Wall Street Journal, October 9, 2022
7) S&P Dow Jones Indices, 2022
9) U.S. Bureau of Economic Analysis, 2022
Are we in a Recession?
A common definition is that a recession occurs when there are two consecutive quarters of declining in gross domestic product (GDP). The GDP is the total of all the goods and services produced in a country. The National Bureau of Economic Research (NBER) determines when the United States (U.S.) is in a recession. It is a private nonpartisan organization that began dating business cycles in 1929. The committee, which was formed in 1978, includes eight economists who specialize in macroeconomic and business cycle research.1 The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The committee looks at the big picture and makes exceptions as appropriate. For example, the economic decline of March and April 2020 was so extreme that it was declared a recession even though it lasted only two months.2
The committee studies a range of monthly economic data, with special emphasis on six indicators: personal income, consumer spending, wholesale-retail sales, industrial production, and two measures of employment. Because official data is typically reported with a delay of a month or two — and patterns may be clear only in hindsight — it generally takes some time before the committee can identify a peak or trough. Some short recessions (including the 2020 downturn) were over by the time they were officially announced.3
Public Opinion
Consumer sentiment is a significant factor. It is a powerful factor in consumer spending. Consumer spending is a substantial part of GDP. An early July poll, 58% of Americans said they thought the U.S. economy was in a recession, up from 53% in June and 48% in May.4 Yet many economic indicators, notably employment, remain strong. The current situation is unusual, and there is little consensus among economists as to whether a recession has begun or may be coming soon.5
GDP
Real (inflation-adjusted) GDP dropped at an annual rate of 1.6% in the first quarter of 2022 and by 0.9% in the second quarter.6
Since 1948, the U.S. economy has never experienced two consecutive quarters of negative GDP growth without a recession being declared. However, the current situation could be an exception, due to the strong employment market and some anomalies in the GDP data.7
Negative first-quarter GDP was largely due to a record U.S. trade deficit, as businesses and consumers bought more imported goods to satisfy demand. This was a sign of economic strength rather than weakness. Consumer spending and business investment — the two most important components of GDP — both increased for the quarter.8
Initial second-quarter GDP data showed a strong positive trade balance but slower growth in consumer spending, with an increase in spending on services and a decrease in spending on goods. The biggest negative factors were a slowdown in residential construction and a substantial cutback in growth of business inventories.9 Although inventory reductions can precede a recession, it’s too early to tell whether they signal trouble or are simply a return to more appropriate levels.10 Economists may not know whether the economy is contracting until there is additional monthly data.7
Employment
Economic data has been mixed recently. Consumer spending declined in May when adjusted for inflation, but bounced back in June.11 Retail sales were strong in June, but manufacturing output dropped for a second month.12 The strongest and most consistent data has been employment. The economy added 372,000 jobs in June, the third consecutive month of gains in that range. Total nonfarm employment is now just 0.3% below the pre-pandemic level, and private-sector employment is actually higher (offset by losses in government employment).13
The unemployment rate has been 3.6% for four straight months, essentially the same as before the pandemic (3.5%), which was the lowest rate since 1969.9 Initial unemployment claims ticked up slightly in mid-July but remained near historic lows.14 In the 12 recessions since World War II, the unemployment rate has always risen, with a median increase of 3.5 percentage points.16
With employment at such high levels, it may be questionable to characterize the current economic situation as a recession. However, the employment market could change, and recessions can be driven by fear as well as by fundamental economic weakness.
Inflation
The fear factor is inflation which ran at an annual rate of 9.1% in June, the highest since 1981.17 Wages have increased, but not enough to make up for the erosion of spending power, making many consumers more cautious despite the strong job market.18 If consumer spending slows significantly, a recession is certainly possible, even if it is not already under way. Inflation has forced the Federal Reserve to raise interest rates aggressively, with a 0.50% increase in the benchmark federal funds rate in May, followed by 0.75% increases in June and July.18 It takes time for the effect of higher rates to filter through the economy, and it remains to be seen whether there will be a “soft landing” or a more jarring stop that throws the economy into a recession.
Among the factors driving inflation are: Covid-19, Russian Invasion of Ukraine, supply chain disruptions, CARES ACTs 1, 2 and 3, fewer homes for sale than buyers, limited supply of semiconductors .
Unfortunately, no one knows the future, and economic forecasts vary significantly. Forecast range from remote chance of a recession to an imminent downturn with a moderate recession in 2023.19 If that turns out to be the case, or if a recession arrives sooner, it’s important to remember that recessions are generally short-lived, lasting an average of just 10 months since World War II. By contrast, economic expansions have lasted 64 months.20 To put it simply: The good times typically last longer than the bad.
Projections are based on current conditions, are subject to change, and may not happen.
1-3) National Bureau of Economic Research, 2021
4) Investor’s Business Daily, July 12, 2022
5) The Wall Street Journal, July 17, 2022
6) U.S. Bureau of Labor Statistics, 2022
7-8) MarketWatch, July 5, 2022
6,9,11,21) U.S. Bureau of Economic Analysis, 2022
10) The Wall Street Journal, July 28, 2022
12) Reuters, July 15, 2022
13–14, 17–18) U.S. Bureau of Labor Statistics, 2022
15) The Wall Street Journal, July 14, 2022
16) The Wall Street Journal, July 4, 2022
19) Federal Reserve, 2022
20) The New York Times, July 1, 2022
Good and Bad News about Social Security
With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern.1 Social Security is financed primarily through payroll taxes. Unless Congress act benefits may eventually be reduced. Trustees of the Social Security Trust Funds release a detailed report to Congress in June. The good news was that the effects of the pandemic were not as significant as projected a year ago.
Mixed news for Social Security
Social Security program consists of two programs, the Old-Age and Survivors Insurance (OASI) program and Disability Insurance (OASDI). Each program has its own financial account (Trust Fund). Payroll taxes collected are deposited in the applicable Trust Fund. OASI provide benefits to retired workers, their families, and survivors of workers. D provides benefits to disabled workers and their families. Funding is also provided by other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation).
Social security is required to invest funds collected in special government-guaranteed Treasury bonds that earn interest. These funds are now being used to pay benefits more than the payroll tax collected. Payroll taxes are not sufficient to pay current benefits. Changes in our demographics are a significant reason for the deficiency.
A recent report by the Trustees estimate that the funds will not be able to fund full retirement and survivor benefits. Benefit would then be reduced to 77% of scheduled OASI benefits, declining to 72% through 2096, the end of the 75-year, long-range projection period.
The Trustees report, estimate the combined reserves (OASDI) will be able to pay scheduled benefits until 2035. Benefit would then be reduced to 80% of scheduled benefits, declining to 74% by 2096. OASI and DI Trust Funds are separate, and generally one program’s taxes and reserves cannot be used to fund the other program. However, this could be changed by Congress, and combining these trust funds in the report is a way to illustrate the financial outlook for Social Security as a whole.
The above is based on current conditions and likely future demographic, economic, and program-specific conditions. Future events including the impact of the pandemic may results in changes not reflected in the Trustee’s estimates.
Some changes can be made to improve the situation
The Trustees continue to urge Congress to address the financial challenges. The sooner Congress acts the less harsh the changes will be. Some of the options that have been suggested including the following:
- Raising the current Social Security payroll tax rate. Increasing the payroll tax to 15.64% from 12.4% would correct the situation
- Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($147,000 in 2022).
- Raising the full retirement age from 67 (for anyone born in 1960 or later).
- Raising the early retirement age from 62.
- Reducing future benefits by about 20.3% for all current and future beneficiaries, or by about 24.1% if reductions were applied only to those who initially become eligible in 2022 or later.
- Changing the benefit formula that is used to calculate benefits.
- Calculating the annual cost-of-living adjustment (COLA) for benefits.
A comprehensive list of potential solutions can be found at https://www.ssa.gov/OACT/solvency/provisions/.
1) Social Security Administration, 2022
Turmoil and the Bear Market
Where we go from here is unknown. There have been many times the stock market and the economy have recovered from worse. The following is intended to be a general discussion. How to proceed will depend on each person’s circumstances (it depends). There are numerous technical issues not included in this discussion.
During the intensely volatile first 100 trading days of 2022, the Stocks of companies in the S&P 500 index delivered their worst performance since 1970 .1 The S&P 500 continued to tumble, and the benchmark index descended into a bear market — typically defined as a sustained drop in stock prices of at least 20% — on June 13, 2022. When the market closed, the S&P 500 had dropped 21.8% from its January 3 peak, and the tech-heavy NASDAQ, already in bear territory, had plunged 32.7% from its November 19, 2021 peak.2
Some investors who are nervous about the future and their portfolios seem to have taken a defensive stance by selling riskier assets, including investments in growth-oriented technology stocks.
What’s causing market volatility?
Throughout 2021, U.S. businesses dealt with unpredictable demand shifts and supply shocks related to the pandemic, but near-zero interest rates and trillions of dollars in pandemic relief supported consumer spending, boosted economic growth, and drove record corporate profits. Companies in the S&P 500 posted profits in 2021 that were 70% higher than in 2020 and 33% higher than in 2019, which helped fuel a stock market total return of nearly 29%.3-4
But in the first months of 2022, investors began to worry that the anticipated tightening of monetary policies by the Federal Reserve — intended to cool off stubbornly high inflation — would stifle economic growth and cause a recession. Prices began rising in the spring of 2021 due to high demand, supply-chain issues, and a labor shortage that pushed up wages. Inflation picked up speed in the first quarter of 2022 when China’s COVID-19 lockdowns impacted the supply of goods, and Russia’s invasion of Ukraine sent already high global food and fuel prices through the roof. In May 2022, the Consumer Price Index rose at an annual rate of 8.6%, a 40-year high.5
The relentless acceleration of price increases puts pressure on the Federal Open Market Committee (FOMC), which meets on June 15 and 16, to act aggressively to tame inflation. At the beginning of May, the FOMC raised the benchmark federal funds rate by 0.5% (to a range of 0.75%–1.00%). This was the first half-percent increase since May 2000, and Fed projections suggest there will be more to come.6
Rising interest rates push bond yields upward, and the opportunity for higher returns from lower-risk bond investments makes higher-risk stock investments less attractive. Moreover, stock investors are buying a portion of a company’s future cash flows, which become less valuable in an inflationary environment. Higher borrowing costs can also crimp consumers’ spending power and cut into the profits of companies that rely on debt.
The problem with one sector dominating the market
Stocks tracked by the S&P Information Technology Sector Index, which fell 29.2% from a January 3 high, have been hit harder than the S&P 500. Plus, like many benchmark indexes, the S&P 500 is weighted by market capitalization (the value of a company’s outstanding shares). This gives the largest companies, most of which are in the tech sector, an outsized role in index performance. As of May 31, the information technology sector still accounted for 27.1% of the market cap of the S&P 500, compared with weightings of 14.4% for health care and 11.2% for financials, the next-largest sectors. Apple, Microsoft, Alphabet, and Amazon, respectively, are the four most-valuable companies in the index; Nvidia is ranked ninth and Meta has fallen to number 11.7
For the past several years, tech stock gains drove the market to new heights, but when their share values began to plunge, they dragged the broader stock indexes down with them. A Wall Street Journal analysis of market data through May 17 found that just eight of the largest U.S. companies — the six previously mentioned, plus Netflix and Tesla (in the consumer discretionary sector) — were responsible for an astounding 46% of the S&P 500’s 2022 losses (on a total return basis).8
These well-known technology companies have grown into massive multinational businesses that have a major influence on everyday life. Some dominate their respective business spaces — social media, smartphones, online search and advertising, e-commerce, and cloud computing — enough to spark antitrust investigations and calls for stricter regulations in the United States and abroad. They also have plenty of cash on hand, which means they may be in better shape to withstand an economic slowdown than their smaller competitors.9
Takeaways
Spreading investments among the 11 sectors of the S&P 500 is a common way to diversify stock holdings. But over time, a stock portfolio that was once diversified can become overconcentrated in a sector that has outperformed the broader market. Tech-sector stocks notched huge total returns of about 50% in 2019, 44% in 2020, and 35% in 2021, so you may want to look closely at the composition of your portfolio and consider rebalancing if you find yourself overexposed to this highly volatile sector. (Rebalancing involves selling some investments to buy others. Keep in mind that selling investments in a taxable account could result in a tax liability.) 10
If you feel shell-shocked after more than five months of market turbulence, try to regain some perspective. Some market analysts view recent price declines as a painful but long overdue repricing of stocks with valuations that had grown excessive, as well as a reality check brought on by waning growth expectations. The forward price-to-earnings (P/E) ratio of companies in the S&P 500 has fallen from 23.3 at the end of 2021 to 17.8 in May 2022, much closer to the 10-year average of 16.9.11-12
It could be a while before investors can better assess how the economy and corporate profits will ultimately fare against fast-rising inflation and higher borrowing costs — and the stock market is no fan of uncertainty. Disappointing economic data and company earnings reports could continue to spark volatility in the coming months.
It may not be easy to take troubling headlines in stride, but if you have a sufficiently diversified, all-weather investment strategy, sticking to it is often the wisest course of action. If you panic and flee the market during a downturn, you won’t be able to benefit from upward swings on its better days. And if you continue investing regularly for a long-term goal such as retirement, a down market may be an opportunity to buy more shares at lower prices.
The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Investments seeking a higher return tend to involve greater risk. Diversification is a method used to help manage risk. It does not guarantee a profit or protect against investment loss. The S&P 500 is an unmanaged group of securities that is considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary. Dollar-cost averaging does not ensure a profit or prevent a loss. Such plans involve continuous investments in securities regardless of fluctuating prices. You should consider your financial ability to continue making purchases during periods of low and high price levels. However, this can be an effective way for investors to accumulate shares to help meet long-term goals.
1) SIFMA, 2022
2) Yahoo! Finance, 2022
3) The New York Times, May 31, 2022
4, 7, 10-11) S&P Dow Jones Indices, 2022
5) U.S. Bureau of Labor Statistics, 2022
6) Federal Reserve, 2022
8) The Wall Street Journal, May 19, 2022
9) The New York Times, May 20, 2022
12) FactSet, 2022
For the past several years, tech stock gains drove the market to new heights, but when their share values began to plunge, they dragged the broader stock indexes
Rising Rates Add to Housing Dilemmas
Home buyers braving the hot U.S. housing market have run headlong into a striking transition. The average interest rate for a 30-year fixed mortgage jumped from around 3.2% at the beginning of 2022 to 5.3% in mid-May, the highest level since 2009. This rise was sparked by the Federal Reserve’s commitment to raise the federal funds rate — a key benchmark for short-term interest rates — to help control the highest inflation in decades.1
Although mortgage rates are not directly tied to the federal funds rate, all borrowing costs are influenced by the Fed’s monetary policies. Mortgage rates tend to track changes in the 10-year Treasury yield, which is sensitive to changes in the funds rate and fluctuates based on the bond market’s longer-term expectations for economic growth and inflation.
Housing Costs Are Soaring
For nearly two years now, buyers have faced an intensely competitive housing market characterized by historically low inventory, bidding wars, and escalating prices. The national median price of existing homes rose 14.8% over the year ending April 2022 to reach $391,200. Home prices are rising in every region, and 70% of the nation’s 185 metro areas experienced double-digit annual increases in the first quarter. In a notable shift, price gains in affordable small- and mid-size cities outpaced gains in more expensive urban markets, as many home buyers seized the opportunity to work remotely.2
Home prices and market conditions can vary widely by region and even by neighborhood. April median prices in the 10 most expensive cities ranged from $662,000 in Denver to $1,875,000 in San Jose. Half of the nation’s 10 priciest markets are in California, a state with a particularly severe and longstanding housing shortage.3
Rents have also been rising. In April 2022, the median rent for 0- to 2-bedroom properties in the 50 largest U.S. metro areas reached $1,827, a year-over-year increase of 16.7%. Spikes were more dramatic in Sun Belt cities such as Miami (51.6%), San Diego (25.6%), and Austin (24.7%).4
In this environment, prospective home buyers, renters who must renew a lease, or anyone looking for a different place to live could find themselves in a challenging situation.
Affordability Is Waning
The combination of rising mortgage rates and home prices has taken a serious toll on affordability. A borrower with a $300,000 mortgage would pay $1,666 per month at a 5.3% rate versus $1,297 at a 3.2% rate, the prevailing rate earlier this year. Affordability is an even bigger issue in high-cost areas and for first-time buyers who haven’t benefited from gains in home equity.
Borrowers who started a home search and were pre-qualified by a lender before rates spiked may not be approved for the mortgages they initially sought. Consequently, demand for adjustable-rate mortgages (ARMs) that offer lower rates has surged in recent months.5 A lower monthly payment makes it possible to qualify for a larger mortgage, so borrowers who expect to move at some point may be comfortable with an ARM that has a fixed rate for the first three, five, seven, or 10 years of the 30-year term before it adjusts to prevailing rates.
Some buyers will change their expectations and settle for a less-expensive home. But others may give up the search if they are not satisfied with the homes they can afford, especially if they are priced out of their favorite neighborhoods. Many entry-level buyers could be forced out of the market entirely, at least for the time being.
Buyers of new homes may be subject to substantial interest-rate risk because purchase contracts are often signed many months before their homes will be completed. With their deposits at stake, buyers might consider paying the extra cost to extend rate locks for six, nine, or even 12 months.
Higher borrowing costs are likely to reduce demand for homes enough to slow price growth, and prices might retreat in some overheated markets. Even so, most economists don’t expect home prices to collapse because market fundamentals are otherwise relatively strong. Inventory levels are still extremely low, and lenders have generally been conservative, so most homeowners who bought in recent years can afford their mortgages.6 Interest rates don’t impact cash buyers, such as downsizing retirees and investors, who account for about 26% of transactions.7 And assuming the economy and employment hold up, there should be plenty of demand from millennials in their peak home buying years.8
Tips for Bewildered First-Time Buyers
Paying rent indefinitely may do little to improve your financial future, but if you are ready to commit to a mortgage, buying a home could stabilize your housing costs for as long as the payment is fixed. You can also build equity in the property as your loan balance is paid off over time — more so if the value appreciates.
No one knows for sure where mortgage rates are headed or what will happen next in the housing market. So how can you decide whether it makes financial sense to purchase a home? As always, the answer depends on where you want to live, your lifestyle preferences, and your finances.
Here are three ways to start preparing for the home buying process.
Become a better borrower. Before you apply for a mortgage, order a copy of your credit report to check for errors and clean up any inaccuracies. Having a higher credit score could earn you a lower interest rate.
Save up for a down payment. Buyers must typically invest 20% of the purchase price for conventional mortgages, but some loan programs allow smaller down payments of 5% to 10%. If parents or other family members offer to “gift” cash for a down payment, lenders may ask for a letter to document the source of funds. There may also be local programs that provide down-payment assistance for buyers who meet income requirements and take classes on home ownership.
Find out how much you can afford to spend. Start with online calculators that take your income, debt, and expenses into account. A mortgage provider can help determine how much you may qualify to borrow. It can take three to five years to recoup real estate transaction costs, so be sure to consider the stability of your employment situation and your income.
1) Bloomberg, May 12, and May 19, 2022
2-3, 7) National Association of Realtors, 2022
4) Realtor.com, 2022
5) The Wall Street Journal, May 5, 2022
6) NPR, May 12, 2022
8) The Wall Street Journal, December 14, 2021
The Question is How Long High Inflation Will Last?
at an annual rate of 8.5% in March 2022. That is the highest level since December 1981.1 A Gallup poll at the end of March found that one out of six Americans considers inflation to be the most important problem facing the United States.2 The Consumer Price Index for All Urban Consumers (CPI-U), the most common measure of inflation, rose
Many economists, including policymakers at the Federal Reserve, believed the increase would be transitory and subside over a period of months when inflation began rising in the spring of 2021. Inflation has proven to be more stubborn than expected. There are many reasons for the rising prices. The Fed has a plan to deal with the situation.
Russia and China contributed to the situation.
Among the cause of rising inflation are the growing pains of a rapidly opening economy, pent-up consumer demand, supply-chain slowdowns, and not enough workers to fill open jobs. Significant government stimulus and the Federal Reserve monetary policies helped prevent a deeper recession but contributed to an increase in inflation.
Russian invasion of Ukraine increased the already high global fuel and food prices.3 China’s response to the reappearance of COVID’s was strict lockdowns, which closed factories and increased already struggling supply chains for Chinese goods. The volume of cargo handled by the port of Shanghai, the world’s busiest port, dropped by an estimated 40% in early April.4
Behind the Headlines
8.5% year-over-year “headline” inflation in March was high. However, monthly numbers provide a clearer picture of the current trend. The month-over-month increase of 1.2% was extremely high, but more than half of it was due to gasoline prices, which rose 18.3% in March alone.5 Despite the Russia-Ukraine conflict and increased seasonal demand, U.S. gas prices dropped in April, but the trend was moving upward by the end of the month.6 The federal government’s decision to release one million barrels of oil per day from the Strategic Petroleum Reserve for the next six months and allow summer sales of higher-ethanol gasoline may help moderate prices.7
Core inflation, which strips out volatile food and energy prices, rose 6.5% year-over-year in March, the highest rate since 1982. However, the month-over-month increase from February to March was just 0.3%, the slowest pace in six months. Another positive sign was the price of used cars and trucks, which rose more than 35% over the last 12 months (a prime driver of general inflation) but dropped 3.8% in March.8
Wages and Consumer Demand
For the 12 months ended in March, average hourly earnings increased 5.6%. This was not enough to keep up with inflation, although it was enough to dulled some of the effects. Lower-paid service workers received higher increases, with wages jumping by almost 15% for nonmanagement employees in the leisure and hospitality industry. Although inflation has cut deeply into wage gains over the last year, wages have increased at about the same rate as inflation over the two-year period of the pandemic.9
One of the big questions going forward is whether rising wages will enable consumers to continue to pay higher prices, which can lead to an inflationary spiral of ever-increasing wages and prices. Recent signals are mixed. The official measure of consumer spending increased 1.1% in March, but an early April poll found that two out of three Americans had cut back on spending due to inflation.10-11
Soft or Hard Landing?
The Federal Open Market Committee (FOMC) of the Federal Reserve has laid out a plan to fight inflation by raising interest rates and tightening the money supply. After dropping the benchmark federal funds rate to near zero in order to stimulate the economy at the onset of the pandemic, the FOMC raised the rate by 0.25% at its March 2022 meeting and projected the equivalent of six more quarter-percent increases by the end of the year and three or four more in 2024.12 This would bring the rate to around 2.75%, just above what the FOMC considers a “neutral rate” that will neither stimulate nor restrain the economy.13
These moves were projected to bring the Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) Price Index, down to 4.3% by the end of 2022, 2.7% by the end of 2023, and 2.3% by the end of 2024.14 PCE inflation was 6.6% in March. this tends to run below CPI, so even if the Fed achieves these goals, CPI inflation will likely remain somewhat higher.15
Fed policymakers have signaled a willingness to be more aggressive, if necessary, and the FOMC raised the funds rate by 0.5% at its May meeting, as opposed to the more common 0.25% increase. This was the first half-percent increase since May 2000, and there may be more to come. The FOMC also began reducing the Fed’s bond holdings to tighten the money supply. New projections to be released in June will provide an updated picture of the Fed’s intentions for the federal funds rate.16
The question facing the FOMC is how fast it can raise interest rates and tighten the money supply while maintaining optimal employment and economic growth. The ideal is a “soft landing,” like what occurred in the 1990s, when inflation was tamed without damaging the economy. At the other extreme is the “hard landing” of the early 1980s, when the Fed raised the funds rate to almost 20% to control runaway double-digit inflation, throwing the economy into a recession.18
Fed Chair Jerome Powell acknowledges that a soft landing will be difficult to achieve, but he believes the strong job market may help the economy withstand aggressive monetary policies. Supply chains are expected to improve over time, and workers who have not yet returned to the labor force might fill open jobs without increasing wage and price pressures.19
The next few months will be a key period to reveal the future direction of inflation and monetary policy. The hope is that March represented the peak and inflation will begin to trend downward. But even if that proves to be true, it could be a painfully slow descent.
Projections are based on current conditions, are subject to change, and may not happen.
1, 5, 8-9) U.S. Bureau of Labor Statistics, 2022
2) Gallup, March 29, 2022
3, 7) The New York Times, April 12, 2022
4) CNBC, April 7, 2022
6) AAA, April 25 & 29, 2022
10, 15) U.S. Bureau of Economic Analysis, 2022
11) CBS News, April 11, 2022
12, 14, 16) Federal Reserve, 2022
13, 17) The Wall Street Journal, April 18, 2022
18) The New York Times, March 21, 2022
Is the Global Economy endangered by Ukraine war?
Globalization of trade was expected to promote peace. Russia’s invasion of Ukraine is taxing that theory. The vulnerabilities of global supply chains are being highlighted. This has compounded the strains caused by the pandemic.
The United States, European Union (EU), United Kingdom (UK), and their allies are using financial sanctions to inflict severe damage on Russia’s economy and pressure its leaders to end the war. This has come a momentous cost to the global economy.
Punishing Russia
The joint effort of these countries to isolate Russia is unparalleled. Some of Russia’s largest banks have been expelled from SWIFT, an international payments system. Assets that Russia’s central bank held in North America and Europe have been frozen, restricting its ability to prop up the value of its currency, the ruble.1
Germany stopped the opening of a new gas pipeline that was intended access natural gas from Russia at the same time the United States and the United Kingdom announced bans on Russian oil imports.2 Hundreds of Western companies have suspended operations or pulled out of Russia, the world’s 11th largest economy, either to comply with sanctions or because of public outrage over the war. Some wealthy oligarchs believed to be close to the Kremlin have also had their assets frozen or seized.3
The effects of sanctions have clearly been felt in Russia, where the central bank raised its key interest rate to 20%, and it’s estimated that the Russian economy could contract up to 10%.4-5 Until recently, Russia was a full participant in the global economy, so being cut off from Western supply chains and technologies could be painful for Russian businesses and consumers. It remains to be seen whether China will step in to fill the void left behind by the West.
Supply Shocks
Russia is a major producer and exporter of food, energy, metals, and other raw materials that often fluctuate in price based on the balance between supply and demand across global markets.6 Therefore, supply shocks stemming from the war and sanctions have caused price spikes for some high-demand goods.
Russia is a top energy exporter, so crude oil and natural gas prices have surged since the conflict began, largely due to concerns about supply constraints. The EU relies heavily on energy imported from Russia (about 40% of its gas supply and almost 25% of its oil). Thus, reductions in energy deliveries from Russia would be difficult to replace and could worsen shortages in the global market.7
Russia is also a major producer of metals such as palladium (needed for catalytic converters), platinum, aluminum, copper, and nickel (needed for batteries).8In addition, about half of the world’s supply of the neon gas used to make semiconductors came from Ukrainian companies that have been forced to close their operations. Until neon production is ramped up elsewhere, shortages could exacerbate the chip shortage that has been slowing the production of new cars, computers, electronic devices, and other products.9
Russia and Ukraine account for nearly 30% of global wheat exports, 17% of corn, 32% of barley, and 75% of sunflower seed oil. Financial sanctions have largely blocked Russia from exporting food, while the conflict has prevented Ukraine from transporting food out of the country. Russia is the world’s top producer of fertilizer, providing about 15% of the global supply. Thus, crop yields throughout the world could be hindered by a shortage of fertilizer, which has risen to record prices alongside the natural gas from which it is often made.10
Consumers everywhere may soon face even higher grocery bills. The United Nations projects that global food costs, which are already at an all-time high, could soar another 22% due to the war. Egypt and other developing nations in North Africa, the Middle East, and Asia are especially dependent on grains from Russia and Ukraine. Disrupted food supplies and elevated prices are expected to cause a notable increase in world hunger.11
Ripple Effects
Russia and Ukraine account for only about 2% of global gross domestic product, but high energy prices and supply shocks caused by the war could have a far-reaching impact on a global economy that has not fully recovered from the pandemic. The Organization for Economic Cooperation and Development (OECD) estimates that global economic growth in the first year after the war began will be 1.1% lower, and inflation will be about 2.5% higher, than they would have been without the invasion. The impact will be greatest for countries with closer trade and financial ties to Russia and Ukraine. Throughout the world, people with lower incomes will likely suffer more because food and energy account for a larger share of spending.12
According to the same OECD report, inflation could rise an additional 2% in the euro area and 1.4% higher in the United States than it would have without the war. The OECD expects 2022 economic growth to be reduced by about 1.4% in the euro area and 0.9% in the United States.13
Russian aggression has caused a humanitarian disaster and an economic catastrophe in Ukraine that are nearly impossible to measure. More than 4 million people have already fled Ukraine, and many more could follow. Without outside help, accommodating the flood of refugees is likely to strain the finances of host governments such as Hungary, Moldova, Poland, Romania, and Slovakia.14
Europe has more exposure to the Russia-Ukraine conflict than the United States, but in both economies, inflation had already climbed to levels that haven’t been seen for decades.15 In the coming months, the world’s key central banks will face the tricky task of raising interest rates enough to control inflation without causing a recession. There could also be longer-term repercussions, such as the reorganization of global supply chains and less integrated financial markets.
Estimates and projections are based on current conditions, are subject to change, and may not happen.
1) The Wall Street Journal, March 18, 2022
2) The Wall Street Journal, March 23, 2022
3) The New York Times, March 22, 2022
4, 15) The Wall Street Journal, March 7, 2022
5) The Wall Street Journal, March 16, 2022
6-8, 12-13) OECD, March 2022
9) Reuters, February 25, 2022
10) The New York Times, March 20, 2022
11) Bloomberg, March 13, 2022
14) Associated Press, March 30, 2022
