Recession, Stagflation, or Both: 5 Reasons to Be Concerned

While fear of recession may be growing in some quarters, so too are fears of stagflation. The very term brings back memories of the 1970s, with high inflation, stagnant economic growth, and general malaise pervading the economy.

Could we be facing another recession as bad as 2008? Or could we be facing a stagflationary decade like the 1970s? Or even worse, could we be facing a combination of both?

If you’re feeling concern and unease about the future of the US economy, you’re not alone, and there’s a reason for that. Here are five factors that are playing a role in growing concern about the direction of the US economy.

1. Housing Market Weakest Since 1970s

The housing market today is about the weakest it has been since the 1970s. Rising interest rates have dampened demand throughout the market, as both sales and refinances have plummeted.

With home prices far higher than they were a few years ago, and interest rates higher than they’ve been in decades, housing affordability has deteriorated. And with the vast majority of existing mortgages having interest rates that are lower than current rates, no one is trying to refinance their mortgages.

It’s no wonder that housing sales have crashed, and that fears of the future of the housing market are growing. Unless prices adjust to reflect the reality of higher interest rates, housing market weakness will remain.

2. Leading Indicators Falling

The Leading Economic Indicators index created by the Conference Board continues to fall, having fallen now for 19 consecutive months. In fact, its performance is the worst that we’ve seen since the failure of Lehman Brothers in 2008.

Looking at the leading indicators chart, every previous instance of the indicators performing this badly either occurred prior to or during a recession. So the fact that leading indicators are still falling would seem to indicate that recession is close, if we’re not already in one.

Remember that recessions are always declared after the fact, like the 2008 recession that began in December 2007 but wasn’t officially declared until December 2008. Just because the NBER hasn’t officially declared a recession doesn’t mean that we may not already be in one.

3. 32 Consecutive Months of Elevated Inflation

Remember when the Federal Reserve was concerned that inflation wasn’t high enough? Yes, that certainly seems quaint today. But there was a time when the Fed worried that inflation was under its 2% target rate, and was prepared to allow inflation to rise above 2% for some time.

Well, the Fed has gotten its wish, with the consumer price index now above the Fed’s target rate for 32 consecutive months. But US consumers are certainly wishing for the “bad” old days of lower inflation, as seemingly relentless price increases have driven up the cost of living for millions of Americans.

While the Fed has all but declared victory over inflation, that seems a bit premature. After all, the 1970s saw inflation bouncing around quite a bit, with inflation not getting back under control until Paul Volcker took the helm of the Fed and tackled inflation in the early 1980s.

We’re not out of the woods yet when it comes to inflation. And if the economy falls into recession and the Fed decides to respond by resorting to quantitative easing, inflation could once again take off.

4. Rising Debt

While the US government’s undisciplined deficit spending has always been problematic, the reality of that problem is just beginning to become apparent to many people. With a national debt approaching $34 trillion, servicing that debt alone is expected to reach over $1 trillion this year.

The size of the national debt is going to result in some major soul-searching in Washington, as the cost of servicing the debt will surpass defense spending and even major entitlement programs like Social Security. At some point Congress is going to have to make difficult decisions to cut back spending if it can’t keep deficits under control.

One of the major threats today is the potential for the US to lose its last AAA credit rating, which could have a major impact on demand for US Treasury securities. Banks and financial institutions that need to hold AAA-rated securities wouldn’t be able to rely on US Treasuries in the event of a downgrade.

And a credit downgrade would also likely lead to higher interest rates for US debt, which could then lead to higher rates throughout the US economy. As we’ve all seen from recent interest rate hikes, higher interest rates depress economic activity.

5. Gold Prices Rising

Unlike the previous items on this list, the gold price rising isn’t necessarily a bad thing, at least if you own gold. Instead, a rising gold price can be symptomatic of an economic downturn.

When fears of recession or other calamity rise, so does demand for gold. People flee to gold as a safe haven asset and store of wealth, and so the gold price tends to rise as a result of that increased demand.

During the stagflation of the 1970s, for instance, the gold price increased 15-fold, which works out to an annualized rate of growth of over 30% per year for the course of the decade. Even when adjusted for the 1970s inflation rates that reached double digits, that still works out to real annualized gains of over 20% per year.

In the aftermath of the 2008 crisis, gold performed well too, with the gold price nearly tripling in price from its 2008 lows and hitting an all-time high. The gold price has hit new all-time high prices since then, as fears during the COVID crisis and now fears of an oncoming recession have pushed up gold prices once again.

The gold price has currently cracked the $2,000 barrier once again, and is within $40 of its all-time high price. And if a recession does materialize, there’s a good chance that the gold price could rise significantly higher.

If you’re worried about the impact that recession or stagflation could have on your finances, you’re not alone. Those fellow Americans who have been buying gold are worried too. And whether they’ve been piling gold coins under their mattresses or buying gold with a gold IRA, gold sales have been booming.

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Don’t let your hard-earned money fall victim to recession or inflation. Call Goldco today to learn more about safeguarding your savings with gold.