July 5, 2022

Editorial: Recession could become self-fulfilling prophecy as confidence wanes

Businesses walk a fine line in an environment of high inflation, increasing interest rates and economic uncertainty.

The latest Business Confidence Index from the Business Research Division of the University of Colorado Boulder Leeds School of Business illustrates the problem. The quarterly index plummeted, falling 12.8 points to 41.1 ahead of the third quarter of 2022. Looking at the fourth quarter, the index stands at 38, the fourth-lowest on record.

A score of 50 is considered neutral, with anything below signaling waning confidence.

The danger is that a lack of confidence will cause business leaders and consumers to pull back on spending, potentially making a recession a self-fulfilling prophecy.

Some economists — though not a majority — believe that we might already be in a recession, defined as two consecutive quarters of declining gross domestic product. Real GDP declined by 1.6% nationally in the first quarter, according to revised estimates. Data for the second quarter is scheduled to be released July 28. If it shows another decline, the U.S. is officially in a recession. If not, we may have dodged a bullet, for now. Of course, it’s possible for Colorado to avoid a recession even if conditions nationally result in one.

The global economy has had to weather numerous storms, including the COVID-19 pandemic and the Russian invasion of Ukraine. Supply-chain disruptions have helped send inflation soaring, prompting the Federal Reserve to raise interest rates dramatically to cool the economy.

Although the Fed has sought to achieve a “soft landing” — cooling the economy and taming inflation without plunging the nation into recession — it’s a very difficult task.

And it’s declining confidence — from consumers and businesses — that might tip us over the edge.

So what should business leaders and consumers do? While it’s certainly not a time for profligate spending, it’s also not a time to bury heads in the sand.

Consumers and businesses should be cautious, but economic declines also create opportunity. Businesses that spend during a recession — if there is one — likely will be in a better position than competitors that did not. It’s a chance to capture market share.

Will a recession come, or is one already here? Either is possible, but the earth doesn’t stop moving during a recession. Deals will still be done. Consumers will still spend. Opportunities still exist, and more likely will emerge.

So business leaders and consumers should prepare, yes. But don’t act as if the world is coming to an end.

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