The late Nobel Prize-winning economist Paul Samuelson once quipped that Wall Street had predicted nine out of the last five recessions. This time, the stock market may be right.
The US economy is starting to show signs of strain under the weight of decades-high inflation and climbing interest rates -- raising the risk of a downturn.
Investors are taking note, with equities nosediving this week as earnings gloom at retailers like Walmart Inc. and Target Corp. fueled the growing fears. And the trend could spell trouble for President Joe Biden, whose Democrats must defend thin Congressional majorities in November’s midterm vote.
Turning Sour | Forecasts for US growth and inflation later this year -- and beyond -- have been deteriorating rapidly
Squeezed by higher prices for gasoline and food, American households are taking on record amounts of debt to help make ends meet. Socked by higher mortgage rates, homebuilders are turning gloomier about the outlook. Small firms are also struggling with rising business costs and difficulties in hiring or retaining workers.
“I don’t think you can have a completely benign soft landing of the economy at this point,” where inflation comes down but unemployment doesn’t go up, said Ethan Harris, head of global economics research at Bank of America Corp. “We’re either going to have a weak economy or a recession.”
Wall Street economists are cutting their growth forecasts in response to a tightening of financial conditions engineered by an inflation-fighting Federal Reserve. The last six months have seen a drop in equity prices, higher interest rates, and a stronger dollar.
‘Uncomfortable’ Odds
Most economists are betting that the economy has enough momentum -- and pent-up demand for automobiles, housing and travel, thanks to savings built up in the pandemic -- to carry it through the end of this year without stumbling. It’s next year and beyond where they see the greater danger. And even then, the consensus is for a slowdown rather than a slump.
In a May 18 note, JPMorgan Chase & Co. chief US economist Michael Feroli said he now sees growth easing from 2.4% in the second half of this year to 1% in the latter half of 2023 as the Fed’s hikes cool off demand, like they’re intended to. Goldman Sachs Group Inc. economists led by Jan Hatzius also downgraded their outlook in the past week.
But a growing number of analysts are warning that something worse could be in store.
“We put the odds that the economy will suffer a downturn beginning in the next 12 months at one in three with uncomfortable near-even odds of a recession in the next 24 months,” Moody’s Analytics chief economist Mark Zandi said in a May 16 note.
A lot depends on what happens with inflation and the Fed. If inflation stays well above the central bank’s 2% target -- it’s more than 3 times higher now -- policy makers may feel compelled to respond forcefully to bring it down, tipping the economy into recession.
The Fed raised interest rates by 50 basis points earlier this month and Chair Jerome Powell has signaled it’s on track to make similar-sized moves at its meetings in June and July.