The U.S. economy could be headed for another recession in the months ahead, as record inflation and rising interest rates will take their toll on consumer spending, which accounts for two-thirds of GDP. But it will be another unusual recession, with some cyclical sectors contining to thrive while others falter.

Recessions are usually periods of declines in real GDP for at least consecutive quarters, led by declines in the cyclical sectors like housing, automobiles, home appliances, entertainment, and tourism and travel. Recessions are also associated with job losses and income declines. They set the economy into a vicious cycle, exaggerating and prolonging GDP declines. At times, this vicious cycle turns mild recessions into severe recessions, as has been the case with the early 1980s recession and 2008-9 recession, also known as the Great Recession.

But there are rare exceptions to this rule, like the pandemic recession of 2020. It was an unusual recession in a couple of respects—first, some cyclical sectors, like the housing sector, stayed hot in a cold economy. For instance, home prices continued to rise during the pandemic recession, as home sales quickly rebounded after a short decline during the lockdowns.

Second, disposable income increased thanks to generous government transfers to unemployed Americans, which in some cases was double or even triple what they earned before losing their jobs. The higher disposable income helped the U.S. economy avoid the vicious cycle of income and spending declines, which prolong recessions. Meanwhile, it set up the economy for a quick recovery, which lasts today.

The trouble is that the quick recovery combined with supply chain bottlenecks and labor market frictions fueled inflation, which is now running at a 40-year high. Driven by higher food and energy prices, inflation is beginning to take its toll on consumer sentiment, as surveys by the University of Michigan and the Conference Board indicate.

Nonetheless, weak consumer psychology has yet to take its toll on consumer spending, as evidenced by recent retail sales data. For instance, retail sales rose by 0.5% in March, according to a government report released Thursday.

But the situation can change quickly as sales held up due to higher gasoline prices, which could slow-down consumer spending in the months ahead. Then there’s the Federal Reserve tightening cycle, which is expected to last until early next year.

"While it's always difficult to precisely predict recessions, I believe we're headed toward one if not this year, then probably next year," says Chris Motola, Financial Analyst at MerchantMaverick.com. "Inflation is capturing a lot of headlines now, but ironically it may be the federal response to it that pushes us toward a recession."

"Mortgage demand is down about 40% from last year. You're going to start seeing many comparisons to 2007, although low inventory may delay a similar housing bubble burst. We're going to be seeing a lot of demand destruction, much of it engineered, in response to ongoing supply chain issues. That's nice when you're trying to control inflation during an overheated economy; not so nice if it leads to massive job losses. Whether or not you believe we're headed for a recession has a lot to do with how well you think the government can thread that needle. It should also be noted that, if a recession arrives, some states will probably feel the effects worse than others."

In addition, the recession will have a different impact on different sectors of the economy, with some cyclical sectors, like housing, declining while other cyclical industries, like tourism, traveling, and entertainment, rallying as Americans will try to catch up with what they missed during the pandemic lockdowns. Meanwhile, non cyclical sectors like healthcare will be booming due to pent-up demand for medical procedures postponed during the pandemic.

And that will make the next recession another unusual recession.

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