Recession Odds: Rising
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Odds of a recession: Now above 50-50.
As we wrote you last week, the case for optimism that we cautiously cited this spring has weakened as the Federal Reserve scrambles to rein in inflation by slowing the economy. Now, it appears that the Fed is going to get what it was determined to sidestep.?
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Note the warning signs emerging now:?
Consumers are turning more cautious in their spending, either because of soaring prices or because they fear an economic downturn later.?Businesses sense this and will adjust plans for their capital investments or hiring. Earnings are mostly good now. But business confidence is poor. “Business is great, but I’m scared to death” is a sentiment that gets repeated a lot, we’ve heard. (Perhaps it applies to your own business these days.)?
The labor market still appears to be strong.?But there are some signs of cracks forming. Stories of formerly aggressive hiring plans getting put on hold, for instance. Layoffs in some industries that had been booming, like tech and e-commerce.?These trends can be self-reinforcing…less spending leads to less hiring and investment, leading to yet more caution.?
Another risk: Europe’s economy looks very shaky...
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As it reels from the spike in energy prices related to the war in Ukraine. 23% of U.S. exports go to Europe, so a serious downturn there could act as a decent drag on GDP growth here.?
If a recession does materialize, we look for it to arrive sometime next year.
Current recession talk seems a bit early. The economy contracted in the first quarter of this year, but that was because of a surge in imports that has since diminished. The second quarter looks like it’ll be better. And there are still sources of momentum, most notably the still-tight labor market. It’ll take a while for those to lose steam.?
How bad of a downturn are we talking about?
Probably not a severe one, we think. Unlike in 2008, there aren’t major risks to the financial system now that could turn a routine recession into a deep slump. The job market is so tight that unemployment would likely stay fairly low, rising to about 4.5%, from 3.6% now. Lower-skilled, lower-paid workers would bear the brunt of layoffs, as they usually do. GDP growth…slowing from 1.9% this year to a bit under 1% for the whole of 2023.?
Recessions are never good. But a modest one might help on some fronts.?
Namely, by cooling demand in sectors where supply is too tight, like autos and especially housing, and buying time for factories and home builders to catch up.?If supply chain problems improve, growth could surge after the recession as consumer confidence rebounds and shoppers take advantage of better selection.?But afterward, the economy will likely return to a 1.5%-2% growth path.