• Business leaders, politicians, and economists are split on how a looming recession could look.
  • One group sees the US sliding into a crippling downturn, while others think the recession will be mild.
  • Here are both sides of the biggest debate facing the US economy.

Talk about an economic downturn has only grown louder in the past six months: Republican lawmakers, JP Morgan CEO Jamie Dimon, and even Coldplay's Chris Martin have all brought up the possibility of a recession in the near future.

But all things considered, the American economy is fairly strong at the moment. The labor market is historically hot, with wages climbing at the fastest pace in decades and plenty of jobs to go around. But inflation stands to squander the progress made over the past two years. Prices are climbing at the fastest pace since the 1980s, forcing the Federal Reserve to aggressively lift interest rates in hopes of slowing demand.

The central bank is trying to engineer a "soft landing," a win-win situation in which inflation cools but unemployment remains low. Pulling one off is a difficult thing to do, and if the Fed errs, it could slow the economy more than anticipated and throw the country into a self-inflicted downturn.

More and more experts expect a recession to hit the US in the next 12 months. Yet what the slump will look like has become a topic of furious debate.

In one corner: 'Hurricane' warnings about the state of the economy blamed on persistent inflation

A growing cast of figures is sounding the alarm on a major recession that can set the recovery back with huge layoffs and weak spending.

Many pin the blame on Biden's $1.9 trillion stimulus law for flooding the economy with cash, boosting demand while supply chains were still snarled due to the pandemic.

Former Treasury Secretary Larry Summers was among the first liberal-leaning economists to sound the alarm. As the stimulus package made its way through Congress, he warned that it risked triggering inflation by overheating the economy. Now, he believes a recession is possible within the next two years due to a combination of stubborn inflation and low unemployment.

"I think that we need to recognize that a soft landing is going to be very difficult in these circumstances," Summers told the Washington Post last week.

In addition, Republicans in Congress are assailing the White House for rising prices bedeviling Americans just about everywhere they turn. With voters expressing pessimism about the state of the economy in numerous surveys, the GOP is hoping to ride that distress back into power in the November midterms.

Others, though, like Tesla CEO Elon Musk are going further. He says the US is in a recession right now. That doesn't seem to be the case at the moment since the economy is still growing.

JP Morgan CEO Jamie Dimon is warning of an economic "hurricane" that's headed for the American economy. "Right now it's kind of sunny, things are doing fine. Everyone thinks the Fed can handle this," he said this week. "That hurricane is right out there down the road coming our way."

In the other corner: Forecasts of a mild downturn that won't harm Americans' strong financial position

Not all recession outlooks call for a crippling downturn. Some of the loudest voices in economic forecasting see a much more shallow recession on the horizon. Others are still hopeful the US can avoid a slump entirely.

The first economists on Wall Street to forecast a recession are fairly optimistic. Deutsche Bank economists led by Matthew Luzzetti penciled in a 2023 downturn in April, arguing the Fed's efforts to rein in inflation will slow growth to a halt. Still, the recession will be a "mild" one, and not like the downturns of 2008 and 2020, the team added.

"The type of recession we're looking at is not like a serious, massive downturn in consumer spending across the board," Brett Ryan, a senior US economist at Deutsche Bank, told Insider in May.

Bank of America followed with a similar projection in April, saying an "inflation shock" will drag on the economy in late 2022. Yet there are "no strong signs of overleverage" in the economy, Alex Lin, a senior US economist at BofA, told Insider. As such, households are in much stronger positions to ride out an economic slowdown compared to the Great Recession.

Americans' spending has also held strong throughout the inflation surge. That's yet another sign the recovery can push forward unscathed, Jason Furman, a former top economist in the Obama administration and an economics professor at Harvard, told The Harvard Gazette in an interview published May 11. 

Spending counts for about two-thirds of all economic activity, making it a critical fuel for the recovery. With demand showing little sign of easing, growth is likely to push forward, Furman said.

"I'm relatively unworried about a recession over the next year because consumer spending has continued to be very strong," he added.

Fed Chair Jerome Powell has repeatedly pointed to the labor market's strength as a sign the US can weather higher interest rates. Job creation continued to surpass the pre-crisis trend through April and the unemployment rate remains at historic lows, signaling the economy doesn't need as much pandemic-era support to keep recovering. Avoiding a recession will be "a challenging task," but the US can still pull off a "soft or soft-ish landing," the Fed chair said in May.

President Joe Biden has maintained a rosy outlook for the US, which isn't too surprising since his party's political ambitions hinge on the economy continuing to heal. The president said in a May 23 press conference that he doesn't think a recession is inevitable, and that the US's recovery has built a healthy buffer for the economy as the Fed fights inflation.

"We have problems that the rest of the world has, but less consequential than the rest of the world has because of our internal growth and strength," Biden said at a press conference in Tokyo. "This is going to be a haul. This is going to take some time."

Read the original article on Business Insider