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Recession?

It is possible that soaring energy costs could trigger a recession. Some believe oil prices could soar as high as $150/barrel. Alienating Russian global supplies is helping drive the price of oil and gas at rather alarming rates, rapidly. Oil and gas impact the price of almost everything and will certainly impact the average consumer’s ability to spend on other things.

The US average consumer consumes over 560 gallons of gas per year. The average U.S. home uses 196 cubic feet of natural gas. Plastics are produced from natural gas, feedstocks derived from natural gas processing, and feedstocks derived from crude oil refining. Almost everything we buy is transported, sometimes long distances, in entities that use gasoline and oil. The US is almost energy independent but pricing of commodities in a global market with OPEC’s baffling control over oil production – imagine if we as a profession formed a cartel to control how much inventory we release into the markets – but it is Europe that is reliant on so much commodity imports that will probably suffer most….thankfully Winter is coming to an end soon requiring less heating.

So is the US heading into a recession? I don’t know. No-one knows for certain. However, its important to note that house prices declined significantly during the 2008-9 Great Recession, but in other modern recessions, house price appreciation hardly shifted, and year-over-year existing-home sales growth barely declined. Home prices and existing home sales don’t necessarily decline just because of a recession. Sometimes the housing market actually benefits by a recession as monetary policy is usually eased to boost the economy, often leading to falling mortgage rates, which increases consumer home buying power that can make homes more affordable.

From July 1981 to November 1982, during the Reagan years, an economic downturn was triggered by tight monetary policy in an effort to fight mounting inflation. It worked, ending a surge of inflation that had started in 1972 and hit a high in the teens in 1980. By 1986 it was under 2%.

A recession may also cool the excessive demand we are currently experiencing – as well as some of the price gouging – which have been one of the prime drivers of supply chain disruptions and rising inflation. Allowing industry to catch up after under-estimating this extreme demand could prepare us for the next surge. Getting the monetary supply balance right will be the key: we want inflation to come down, but we DON’T want tens of thousands of job losses.