<p>This question is really a set of questions.</p>
<p>1 ) Will raising rates lead to a recession? <br>
2 ) Will the US go into a recession (whatever the cause)?<br>
3 ) Would a US recession have spillover effects to other countries?<br>
4 ) Would a recession in the US impact Canada in particular?<br>
5 ) Is the trade deficit causing GDP declines (recessions)?</p>
<p>I'll start with 5 )</p>
<p><strong>5 )</strong> It is shocking how many presumably reliable news providers like (<a href="https://www.nytimes.com/live/2022/04/28/business/gdp-inflation-news" rel="nofollow noreferrer">NYT</a>, <a href="https://www.bloomberg.com/news/articles/2022-04-28/u-s-economy-contracted-in-first-quarter-on-surge-in-trade-gap" rel="nofollow noreferrer">Bloomberg</a>, the CNBC article, supposedly the Economist) and even <a href="https://www.cato.org/commentary/spectacular-economic-ignorance-peter-navarro" rel="nofollow noreferrer">a Harvard economics PhD</a> and the <a href="https://twitter.com/MichaelRStrain/status/1519715176689414144?s=20&amp;t=WGTodl0u_4Y7uTbC8TG-BQ" rel="nofollow noreferrer">Director of Economic Policy Studies and Senior Fellow at the American Enterprise Institute</a> are being mislead by how GDP is defined. To defend some, it seems they simply copy paste statements without looking into details (<a href="https://abcnews.go.com/US/wireStory/us-economy-shrank-14-q1-consumers-spending-84367864" rel="nofollow noreferrer">ABC News</a>, <a href="https://www.wsj.com/articles/the-gdp-mirage-11651160035?mod=hp_minor_pos20" rel="nofollow noreferrer">WSJ</a>, <a href="https://www.marketwatch.com/story/coming-up-u-s-first-quarter-gdp-11651147557" rel="nofollow noreferrer">Marketwatch</a>, <a href="https://eu.usatoday.com/story/money/2022/04/28/us-economy-growth-first-quarter/9562730002/" rel="nofollow noreferrer">USA Today</a> or Bloomberg and CNBC above all use a nearly identical phrase).</p>
<p>The definition of <span class="math-container">$GDP = C + I + G + (X – M)$</span> leads to the very common misconception that GDP declines with higher imports; after all, you subtract imports <span class="math-container">$M$</span> from GDP.</p>
<p>However, that simply ignores why this is done. GDP is supposed to measure domestic production, so imports (foreign production) should have no impact on GDP. There are various sources trying to correct this misconception, with <a href="https://noahpinion.substack.com/p/imports-do-not-subtract-from-gdp?s=r" rel="nofollow noreferrer">Noah Smith</a> reacting to the latest surge in this voodoo accounting. He also cites the <a href="https://research.stlouisfed.org/publications/page1-econ/2018/09/04/how-do-imports-affect-gdp" rel="nofollow noreferrer">FED primer</a> mentioned in a comment here.</p>
<p>For short, imports are also a positive (but hidden) component of consumption, investment, and government spending.</p>
<p>The US trade deficit will persist or widen</p>
<ul>
<li>as long as there is sustained higher growth in the US relative to Japan and Europe,</li>
<li>the USD is rising,</li>
<li>the US savings rate is low (if people should save more would be another interesting question),</li>
<li>there is high demand for US assets from foreign investors, and</li>
<li>high domestic (consumption) demand.
However, what certainly is not the case is that a trade deficit reduces GDP.</li>
</ul>
<p><strong>1 )</strong> All else equal, most likely. However, interest rates <a href="https://www.imf.org/external/pubs/ft/fandd/basics/monpol.htm" rel="nofollow noreferrer">usually change</a> exactly because of changes in inflation and GDP growth, which is why you frequently read sentences about monetary policy responses. What the CNN article about the DB report states is somewhat different though. The exact words:</p>
<blockquote>
<p>History shows the Fed has &quot;never been able to correct&quot; even smaller
overshoots of inflation and employment &quot;without pushing the economy
into a significant recession,&quot;... Given that the job market has
&quot;over-tightened&quot; by as much as two percentage points of unemployment,
the bank said, &quot;Something stronger than a mild recession will be
needed to do the job.&quot;</p>
</blockquote>
<p>This statement seems to imply that DB believes that the FED will do &quot;whatever it takes&quot; to fight inflation. Since consumer spending is very high, and unemployment the lowest since the 1950s (according to the CNN article), cooling off inflation (bringing down an overheated economy) will require a recession. The article also refers to the FED being behind the curve in 1980 (where Paul Volker aggressively raised rates to fight inflation - which caused a recession).</p>
<p>In any case, raising interest rates from near zero or even below zero to still <a href="https://fred.stlouisfed.org/series/DFF" rel="nofollow noreferrer">historically extremly low rates</a> will not result in a recession in itself.</p>
<p><a href="https://i.sstatic.net/liTJi.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/liTJi.png" alt="enter image description here" /></a></p>
<p>You can look at the below chart from <a href="https://economics.stackexchange.com/a/50437/37817">this answer</a> to see how low interest rates are compared to the current inflation rate (usinG CPI) in a historical context.
<a href="https://i.sstatic.net/nX4OZ.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/nX4OZ.png" alt="enter image description here" /></a></p>
<p>However, current inflation rates are also largely caused by supply shocks and shortages (Covid, Ukraine war...) which will not directly be affected by somewhat higher interest rates. Supply shocks combined with raising rates may very well result in recessions.</p>
<p>The Washington post article does not really address interest rates too much. According to one sentence, the main message could be thought to be that rate hikes could cause a recession</p>
<blockquote>
<p>Although major swaths of the economy — including the job market and
consumer spending — remain robust, there are mounting worries that
rising borrowing costs for consumers and businesses, after years of
near-zero interest rates, could cause a sudden retrenchment.</p>
</blockquote>
<p>BUT, if you read the article carefully I kind of feel like all else that is written in that article refers to other issues, which brings us directly to <strong>2 )</strong>. The main points made are</p>
<ul>
<li><p>Continued uncertainty from the coronavirus pandemic and Russia’s invasion of Ukraine</p>
</li>
<li><p>Disappointing retail sales and profits <strong>this week</strong> because of higher costs and overstocked inventory issues, engineered to avoid supply chain disruptions.</p>
<p>“When we talk to our guests, they often express their concerns about a host of rapidly changing conditions, ranging from geopolitics to the high and persistent inflation they’ve been experiencing.” <br>
Interestingly, the same article also writes that there was a 0.9 percent increase in overall retail sales from a month earlier.</p>
</li>
</ul>
<p>This fears seem entirely unrelated to interest rates (if anything, rising rates should easy their worries about high and persistent inflation).</p>
<ul>
<li>Goldman cites higher prices and continued supply chain disruptions as reason why they lowered GDP forecasts</li>
<li>International turmoil, including a risk of recession in Europe and China, is dimming the outlook for the U.S. economy.</li>
<li>More rate hikes might be needed to cool the economy (this implies growth and demand  is very strong now; if we fear a recession, there would be no need to slow down economic growth)</li>
</ul>
<p>Overall, there are a lot of risks that may cause a recession. A recession is a common thing that happens literally &quot;all&quot; the time. You can have a look at  the <a href="https://fred.stlouisfed.org/series/USREC" rel="nofollow noreferrer">NBER based Recession indicator</a> on FRED for example. A value of 1 is a recessionary period, while a value of 0 is an expansionary period.</p>
<p><a href="https://i.sstatic.net/Ja24a.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/Ja24a.png" alt="enter image description here" /></a></p>
<p>Just looking at this data suggests that the central bank (FED) actually did get better at what it is doing (control inflation and aim for  maximum employment; which is directly related to the health of the economy). Insofar, it seems unlikely that the FED raising rates will be the reason for a recession. On the other hand, given the large lists of other problems, it seems quite likely that the US and the world will face problems in the near future.</p>
<p><strong>3 )</strong> and <strong>4 )</strong>
The old adage “when the U.S. sneezes Canada catches cold” or “when the U.S. sneezes the world catches a cold” refers to the strong links economies have with each other, and the sheer size of the US economy in particular.</p>
<p>The rest of the world consists of a lot of different countries. If you define a downturn as a recession, defined as negative economic growth, that is extremely unlikely. For example, Chinas GDP still grew a lot in 2008 and 2009 (albeit lower than the years before), whereas US GDP declined sharply.</p>
<p>For Canada in particular, there is a huge amount of trade with the US. If the US suffers, Canada will definitely feel that. However, Canada will also (already does) feel the supply shocks that propagate through the world. If there will be a recession it is certainly NOT just because the US raises rates (Canada has its own monetary policy and a floating exchange rate after all).</p>

CC BY-SA 4.0
2022-05-22T03:16:09.777Z
2022-05-24T08:55:42.347Z
2022-05-24T08:55:42.347Z
AKdemy
<p>Recently there has been increasing speculation regarding USA going into recession (since rate hikes can cause recessions):</p>
<p><a href="https://www.washingtonpost.com/business/2022/05/19/recession-economy-markets/" rel="nofollow noreferrer">https://www.washingtonpost.com/business/2022/05/19/recession-economy-markets/</a></p>
<p><a href="https://edition.cnn.com/2022/04/26/economy/inflation-recession-economy-deutsche-bank/index.html" rel="nofollow noreferrer">https://edition.cnn.com/2022/04/26/economy/inflation-recession-economy-deutsche-bank/index.html</a></p>
<p>The US economy already contracted in the first quarter and the reason for that is the trade deficit:</p>
<p><a href="https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html" rel="nofollow noreferrer">https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html</a></p>
<p>So will USA be going into a recession ? What are indicators of that ? If that happens will there be an economic downturn in the entire world ? (I am mostly concerned about Canada)</p>

CC BY-SA 4.0
2022-05-20T20:54:05.957Z
I find it hard to grasp what you intend to ask. A large trade deficit can actually indicate economic growth. When the economy of a country grows and strengthens, consumers have more wealth to purchase goods from overseas, which will increase the trade deficit. A strong economy also attracts foreign investors, further enlarging the trade deficit. Inflation is a general increase in the prices of goods and services in an economy. If you ask if high inflation is encouraging higher interest rates, yes, that is the general idea of monetary policy.
Alex
CC BY-SA 4.0
2022-05-21T08:16:04.477Z
@Alex I am talking of the current trade deficit which the Economist and CNBC has stated as the reason for contraction of the Economy in the first quarter of 2022 https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html
Ash Rivers
CC BY-SA 4.0
2022-05-21T22:01:45.067Z
Well, I guess the Economist and CNBC should read a bit about [GDP accounting](https://research.stlouisfed.org/publications/page1-econ/2018/09/04/how-do-imports-affect-gdp) before claiming this. GDP measures domestic production, so imports (foreign production) have no impact on GDP.
Alex
<macroeconomics><inflation><interest-rate><central-banking>
Why is there increased speculation that America might go into a recession ? If they do will the rest of the world also face downturn?
Ash Rivers
# Why is there increased speculation that America might go into a recession ? If they do will the rest of the world also face downturn?

(Asked by: username_0 on 2022-05-20)

Recently there has been increasing speculation regarding USA going into recession (since rate hikes can cause recessions):

<https://www.washingtonpost.com/business/2022/05/19/recession-economy-markets/>

<https://edition.cnn.com/2022/04/26/economy/inflation-recession-economy-deutsche-bank/index.html>

The US economy already contracted in the first quarter and the reason for that is the trade deficit:

<https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html>

So will USA be going into a recession ? What are indicators of that ? If that happens will there be an economic downturn in the entire world ? (I am mostly concerned about Canada)

**Tags:** macroeconomics, inflation, interest-rate, central-banking

> **Comments:**
> **username_1**: I find it hard to grasp what you intend to ask. A large trade deficit can actually indicate economic growth. When the economy of a country grows and strengthens, consumers have more wealth to purchase goods from overseas, which will increase the trade deficit. A strong economy also attracts foreign investors, further enlarging the trade deficit. Inflation is a general increase in the prices of goods and services in an economy. If you ask if high inflation is encouraging higher interest rates, yes, that is the general idea of monetary policy.  
> **username_0**: @username_1 I am talking of the current trade deficit which the Economist and CNBC has stated as the reason for contraction of the Economy in the first quarter of 2022 https://www.cnbc.com/2022/04/28/us-q1-gdp-growth.html  
> **username_1**: Well, I guess the Economist and CNBC should read a bit about [GDP accounting](https://research.stlouisfed.org/publications/page1-econ/2018/09/04/how-do-imports-affect-gdp) before claiming this. GDP measures domestic production, so imports (foreign production) have no impact on GDP.  

---

## 1 answers

### Answer by username_2 on 2022-05-22. Score: 1

This question is really a set of questions.

1 ) Will raising rates lead to a recession?   
2 ) Will the US go into a recession (whatever the cause)?  
3 ) Would a US recession have spillover effects to other countries?  
4 ) Would a recession in the US impact Canada in particular?  
5 ) Is the trade deficit causing GDP declines (recessions)?

I'll start with 5 )

**5 )** It is shocking how many presumably reliable news providers like ([NYT](https://www.nytimes.com/live/2022/04/28/business/gdp-inflation-news), [Bloomberg](https://www.bloomberg.com/news/articles/2022-04-28/u-s-economy-contracted-in-first-quarter-on-surge-in-trade-gap), the CNBC article, supposedly the Economist) and even [a Harvard economics PhD](https://www.cato.org/commentary/spectacular-economic-ignorance-peter-navarro) and the [Director of Economic Policy Studies and Senior Fellow at the American Enterprise Institute](https://twitter.com/MichaelRStrain/status/1519715176689414144?s=20&t=WGTodl0u_4Y7uTbC8TG-BQ) are being mislead by how GDP is defined. To defend some, it seems they simply copy paste statements without looking into details ([ABC News](https://abcnews.go.com/US/wireStory/us-economy-shrank-14-q1-consumers-spending-84367864), [WSJ](https://www.wsj.com/articles/the-gdp-mirage-11651160035?mod=hp_minor_pos20), [Marketwatch](https://www.marketwatch.com/story/coming-up-u-s-first-quarter-gdp-11651147557), [USA Today](https://eu.usatoday.com/story/money/2022/04/28/us-economy-growth-first-quarter/9562730002/) or Bloomberg and CNBC above all use a nearly identical phrase).

The definition of $GDP = C + I + G + (X – M)$ leads to the very common misconception that GDP declines with higher imports; after all, you subtract imports $M$ from GDP.

However, that simply ignores why this is done. GDP is supposed to measure domestic production, so imports (foreign production) should have no impact on GDP. There are various sources trying to correct this misconception, with [Noah Smith](https://noahpinion.substack.com/p/imports-do-not-subtract-from-gdp?s=r) reacting to the latest surge in this voodoo accounting. He also cites the [FED primer](https://research.stlouisfed.org/publications/page1-econ/2018/09/04/how-do-imports-affect-gdp) mentioned in a comment here.

For short, imports are also a positive (but hidden) component of consumption, investment, and government spending.

The US trade deficit will persist or widen

* as long as there is sustained higher growth in the US relative to Japan and Europe,
* the USD is rising,
* the US savings rate is low (if people should save more would be another interesting question),
* there is high demand for US assets from foreign investors, and
* high domestic (consumption) demand.
  However, what certainly is not the case is that a trade deficit reduces GDP.

**1 )** All else equal, most likely. However, interest rates [usually change](https://www.imf.org/external/pubs/ft/fandd/basics/monpol.htm) exactly because of changes in inflation and GDP growth, which is why you frequently read sentences about monetary policy responses. What the CNN article about the DB report states is somewhat different though. The exact words:

> History shows the Fed has "never been able to correct" even smaller
> overshoots of inflation and employment "without pushing the economy
> into a significant recession,"... Given that the job market has
> "over-tightened" by as much as two percentage points of unemployment,
> the bank said, "Something stronger than a mild recession will be
> needed to do the job."

This statement seems to imply that DB believes that the FED will do "whatever it takes" to fight inflation. Since consumer spending is very high, and unemployment the lowest since the 1950s (according to the CNN article), cooling off inflation (bringing down an overheated economy) will require a recession. The article also refers to the FED being behind the curve in 1980 (where Paul Volker aggressively raised rates to fight inflation - which caused a recession).

In any case, raising interest rates from near zero or even below zero to still [historically extremly low rates](https://fred.stlouisfed.org/series/DFF) will not result in a recession in itself.

[![enter image description here](https://i.sstatic.net/liTJi.png)](https://i.sstatic.net/liTJi.png)

You can look at the below chart from [this answer](https://economics.stackexchange.com/a/50437/37817) to see how low interest rates are compared to the current inflation rate (usinG CPI) in a historical context.
[![enter image description here](https://i.sstatic.net/nX4OZ.png)](https://i.sstatic.net/nX4OZ.png)

However, current inflation rates are also largely caused by supply shocks and shortages (Covid, Ukraine war...) which will not directly be affected by somewhat higher interest rates. Supply shocks combined with raising rates may very well result in recessions.

The Washington post article does not really address interest rates too much. According to one sentence, the main message could be thought to be that rate hikes could cause a recession

> Although major swaths of the economy — including the job market and
> consumer spending — remain robust, there are mounting worries that
> rising borrowing costs for consumers and businesses, after years of
> near-zero interest rates, could cause a sudden retrenchment.

BUT, if you read the article carefully I kind of feel like all else that is written in that article refers to other issues, which brings us directly to **2 )**. The main points made are

* Continued uncertainty from the coronavirus pandemic and Russia’s invasion of Ukraine
* Disappointing retail sales and profits **this week** because of higher costs and overstocked inventory issues, engineered to avoid supply chain disruptions.

  “When we talk to our guests, they often express their concerns about a host of rapidly changing conditions, ranging from geopolitics to the high and persistent inflation they’ve been experiencing.”   
  Interestingly, the same article also writes that there was a 0.9 percent increase in overall retail sales from a month earlier.

This fears seem entirely unrelated to interest rates (if anything, rising rates should easy their worries about high and persistent inflation).

* Goldman cites higher prices and continued supply chain disruptions as reason why they lowered GDP forecasts
* International turmoil, including a risk of recession in Europe and China, is dimming the outlook for the U.S. economy.
* More rate hikes might be needed to cool the economy (this implies growth and demand is very strong now; if we fear a recession, there would be no need to slow down economic growth)

Overall, there are a lot of risks that may cause a recession. A recession is a common thing that happens literally "all" the time. You can have a look at the [NBER based Recession indicator](https://fred.stlouisfed.org/series/USREC) on FRED for example. A value of 1 is a recessionary period, while a value of 0 is an expansionary period.

[![enter image description here](https://i.sstatic.net/Ja24a.png)](https://i.sstatic.net/Ja24a.png)

Just looking at this data suggests that the central bank (FED) actually did get better at what it is doing (control inflation and aim for maximum employment; which is directly related to the health of the economy). Insofar, it seems unlikely that the FED raising rates will be the reason for a recession. On the other hand, given the large lists of other problems, it seems quite likely that the US and the world will face problems in the near future.

**3 )** and **4 )**
The old adage “when the U.S. sneezes Canada catches cold” or “when the U.S. sneezes the world catches a cold” refers to the strong links economies have with each other, and the sheer size of the US economy in particular.

The rest of the world consists of a lot of different countries. If you define a downturn as a recession, defined as negative economic growth, that is extremely unlikely. For example, Chinas GDP still grew a lot in 2008 and 2009 (albeit lower than the years before), whereas US GDP declined sharply.

For Canada in particular, there is a huge amount of trade with the US. If the US suffers, Canada will definitely feel that. However, Canada will also (already does) feel the supply shocks that propagate through the world. If there will be a recession it is certainly NOT just because the US raises rates (Canada has its own monetary policy and a floating exchange rate after all).


---

