Title: The US Economy on the Verge of an Imminent Recession: Here’s Why
Despite the confidence built from lower inflation, strong job market, and consumer spending, recent economic events in the US indicate that a recession may be looming. Various factors, including a potential auto strike, the resumption of student loan payments, and a possible government shutdown, combined with other powerful forces such as dwindling pandemic savings, soaring interest rates, and higher oil prices, could tip the US economy into a downturn sooner than anticipated. This article outlines six reasons why a recession remains a possibility, drawing from historical patterns and data.
1. Soft Landing Calls Always Precede Recessions:
History has shown that soft landing calls, which predict a smooth economic transition, often precede recessions. Economists find it challenging to anticipate recessions because forecasting typically assumes a linear continuation of current economic trends. Recessions, however, are non-linear events that the human mind struggles to comprehend. Even the Federal Reserve, represented by former President Janet Yellen’s optimistic forecast of a soft landing in 2007 before the Great Recession, has often been caught off guard.
2. Fed Hikes Are About to Bite Hard:
Monetary policy operates with long and variable lags, as stated by economist Milton Friedman. While certain sectors like stocks, manufacturing, and housing may seem strong, they are also the areas most vulnerable to rate hikes. The full impact of the Federal Reserve’s rate hikes, which have totaled 525 basis points since early 2022, will be felt towards the end of this year or early 2024. As a result, there is a chance that stocks and housing will begin to decline, potentially signaling an economic slowdown.
3. A Downturn Is Hiding in Plain Sight in the Forecasts:
Consensus forecasts already indicate warning signs of a potential downturn. The National Bureau of Economic Research (NBER), responsible for officially declaring recessions, relies on indicators such as income, employment, consumer spending, and factory output. By using these key indicators, Bloomberg Economics’ model predicts that a US recession will likely begin in the closing months of 2023.
4. Shocks That Are Yet to Hit:
Several impending shocks threaten to disrupt the US economy. These include the ongoing auto strike, the resumption of student loan payments, the surge in oil prices, the impact of rising borrowing costs on equity markets and the housing sector, the global economic slump, and the potential for a government shutdown. Each of these factors has the potential to significantly influence GDP growth and further increase the likelihood of a recession.
5. Beyonce Can Only Do So Much:
Household spending, often seen as a reliable indicator of economic health, may not accurately predict an impending recession. Historical trends show that consumers tend to continue spending until the brink of an economic downturn. Furthermore, the extra savings accumulated during the pandemic are running out, and the San Francisco Fed estimates that they have been exhausted by the end of September. With savings depleted and entertainment expenditures on the decline, consumption drivers are weakening, as reflected in surging credit-card delinquency rates and troubled segments of the auto-loan market.
6. The Credit Squeeze Is Just Getting Started:
Another concerning factor is the credit squeeze that is beginning to take effect. Rising interest rates and tightening lending conditions could significantly impact borrowing, leading to further economic instability. Indicators such as credit-card delinquency rates, particularly among younger Americans, and deteriorating auto-loan market conditions are signs that the credit squeeze is underway.
While many remain optimistic about the US economy’s ability to avoid a recession, history and current data suggest that complacency may be misplaced. Factors such as soft landing calls, impending shocks, weakening consumption drivers, and a credit squeeze indicate a potential economic downturn in the near future. Thus, it is crucial to remain cautious and prepared for the possibility of an imminent recession.