Why the US Could Face a Recession Soon?
In the face of expectations for a smooth economic trajectory, it’s essential to be prepared for potential turbulence. Recent economic history has repeatedly demonstrated this lesson, and it’s a cautionary note for the current state of the United States’ economy.
The summer witnessed a decline in inflation, steady employment rates, and ongoing consumer spending, which boosted confidence, particularly at the Federal Reserve. Many believed that the largest economy globally would avoid a recession.
While a last-minute agreement prevented a government shutdown and deferred one immediate risk, several factors loom that could impact the US economy negatively. These include the possibility of a major auto strike, the resumption of student loan repayments, and the potential resurgence of a shutdown once the stop-gap spending agreement expires. These shocks could collectively shave off a significant portion of GDP growth in the fourth quarter.
These factors, combined with other influential forces acting on the economy such as reduced pandemic savings, rising interest rates, increasing oil prices, and even unexpected events like the conclusion of Taylor Swift’s concert tour, raise concerns about the potential for a recession in the near future.
Here are six reasons why Bloomberg Economics sees a recession as a plausible scenario, encompassing aspects like psychological reactions, monetary policy mechanics, labor strikes, elevated oil prices, and a looming credit crunch.
The United Auto Workers union’s strike at the Big Three American automakers, a simultaneous occurrence for the first time, carries significant consequences due to the industry’s extensive supply chains. In the past, strikes have caused substantial disruptions, leading to sizable job losses.
The expiration of the three-and-a-half-year pandemic-induced freeze on student loan payments means millions of Americans will resume paying their student loans. This could further dampen economic growth in the fourth quarter.
Surges in crude oil prices, which impact households directly, often serve as reliable indicators of impending economic downturns. Recent increases in oil prices to over $95 per barrel are a concerning development.
A surge in the yield of 10-year Treasuries to a 16-year high of 4.6 percent in September has led to higher borrowing costs. This has already affected equity markets and could jeopardize the housing recovery and corporate investments.
Global economic challenges, particularly in China and the euro area, could exert downward pressure on the US economy. China faces a real-estate crisis, and lending in the euro area is contracting rapidly, signaling stagnation or worse.
While a 45-day deal has temporarily averted a government shutdown, the risk remains as it could impact fourth-quarter GDP numbers. Each week of shutdown typically reduces annualized GDP growth by 0.2 percentage points.
Furthermore, the additional savings accumulated by Americans during the pandemic, largely due to stimulus checks and lockdowns, have been largely depleted. This depletion of savings, especially among the lower-income population, may have significant economic consequences.
Economists have learned humility in recent years, as traditional forecasting models failed to predict major disruptions such as the pandemic and geopolitical conflicts. Given the confluence of factors like Federal Reserve policy changes, labor strikes, student loan obligations, oil price increases, and a global economic slowdown, a soft landing for the US economy remains possible but far from guaranteed. The United States appears to be navigating a complex economic landscape, which raises doubts about the most likely outcome being a smooth one.