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Why The Economy is Slowing Down

Why The Economy is Slowing Down

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You’ve likely heard all about it: The economy is slowing down. Companies are laying people off. The stock market isn’t seeing gains like in recent years. And many people feel that a recession is around the corner. They may be right. Because the economy is, in fact, slowing down.

Just how slow? Time will tell. We don’t know what’s going to happen, and the economy could tip into a recession. That wouldn’t be ideal, of course, but it’s a distinct possibility. But what you may be wondering, however, is why? Why is the economy slowing down? Why is this happening?

It’s by design, to a degree. So, let’s recap just what the heck is happening in the economy as of mid-2023.

The Fed is slowing down the economy to combat inflation

The economy is mainly slowing down due to rising interest rates. Interest rates are controlled by the Federal Reserve, and the Fed has been raising rates in response to rising prices (inflation). The main idea is that by making it more expensive to borrow money, overall demand in the economy will die down. By lowering demand, you can increase supply (of everything, really), which should lower prices.

That, in large part, is what’s going on. There are a million other factors at play, but rising interest rates are the big domino that toppled over, taking a lot of other dominos with it. 

By lowering demand, businesses need fewer employees to produce stuff. For example, you don’t need to build boats if nobody is ordering them, and that means laying off people who work in boat factories — at least until demand for boats increases. Again, this is all theoretical, but so far, the Fed’s plan has been working. Inflation rates are slowing — no, that doesn’t mean that prices are decreasing, just that the rate of price increases is slowing down — and so far, job losses have been at a minimum.

That doesn’t mean that the slowdown isn’t real, though. It just hasn’t been as severe as many people expected.

What happens next?

Again, we don’t know what happens next. Interest rates could continue to go up, which could continue to slow the economy down. It’s up to the Fed, though, as to how much they want to tamper down demand. That’s something to keep an eye on.

In the meantime, it’s likely that many businesses will continue to lay off workers in order to cut costs. That’s not a guarantee, of course, but likely. That will continue to slow the economy down. If, however, the Fed reverses course and starts to lower interest rates — which it very well might do — the economy could perk up again. It’ll likely take several months, but that’s a possibility.

Above all, remember this: We’re living through strange and unprecedented economic times. The pandemic threw the whole world for a loop, and things are still getting back to “normal,” in many respects. We don’t really have a good grasp of what’s going on right now, and many aspects of the economy have likely changed permanently.

For instance, there are a lot of jobs out there that are now “remote” that were not before. That’s affecting commercial real estate, restaurant businesses, parking revenues, and a host of other things all across the country. It’s a big, complicated web, and there’s little use trying to make sense of it all.

But paying attention is important. You can hope for the best, too, but keep in mind that the economy is cyclical. We’ll have our ups and downs, whether we do it deliberately, or not.

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