According to mounting concerns from banks and analysts, the United States might enter a recession within the next year, as a sudden spell of pessimism pounds financial markets, which fell further from recent highs on Thursday. Although important sectors of the economy, such as job demand and consumer spending, remain strong, there are growing concerns that the rising cost of borrowing for individuals and companies, following years of near-zero lending rates, may create a sharp slowdown. So far this year, the Fed Reserve has lifted borrowing costs by 0.75 percentage points, with policymakers indicating that more aggressive rises may be required to calm the economy. In addition, the ongoing unpredictability caused by the coronavirus outbreak and Russia’s invasion of Ukraine adds to the unease.
On Thursday, financial markets plummeted again; a day after the Dow Jones industrial index experienced its most significant drop. The S&P 500 fell into the bear market territory, defined as a 20% decline from the most recent top, after Wednesday’s sell-off wiped off more than 4% of its value. “Economic downturn risks now high — alarmingly high — and growing,” said Moody’s Analytics chief economist Mark Zandi. “We need some extremely skillful policy from the Fed and a little luck for the economy to get through without a slump.”
In the last week alone, retired Goldman Sachs CEO Lloyd Blankfein warned of a “very, very great danger” of a downturn; Wells Fargo CEO Charlie Scharf stated that there is “no doubt” that the U.S. economy is headed for a recession, and ex-Fed Chair Ben Bernanke warned that the country might be headed for “stagflation”—a sluggish economy mixed with rising inflation. These worries come amid a slew of data pointing to economic slowing, specifically in interest-rate-sensitive industries that are already bearing the brunt of the Fed’s commitment to continue tightening monetary conditions. In April, the new house building halted. Mortgage demand is continuing to fall.
This week, several of the country’s largest and most potent merchants reported dismal sales and earnings due to higher expenses and overstocked inventory concerns, designed to minimize supply chain disruptions and a stock market crash. Walmart shares fell more than 11% on Tuesday, the company’s most significant one-day drop in 35 years. Target shares fell 26percentage points on Wednesday, following a surprising 52 percent reduction in quarterly earnings, which officials blamed in part on slowing demand for big-ticket products like T.V.s, kitchen appliances, and outdoor furniture.
“Although we expected a post-stimulus slowing in certain categories… we did not foresee the scale of that change,” Target CEO Brian Cornell said on a conference call with analysts on Wednesday. “When we speak with our visitors, they frequently voice their concerns about various fast-changing events, from geopolitical to the persistently high inflation they’ve been experiencing.” Goldman Sachs cut its 2nd quarter U.S. economic growth prediction to 2.5 percent annualized, citing increased pricing and ongoing supply chain disruptions. This comes on the heels of an unexpected downturn in the first three months of 2022, when the GDP shrank by 1.4 percent, primarily due to a trade deficit and a reduction in inventory purchases.
Global upheaval, including the likelihood of a European and Chinese recession, is clouding the picture for the U.S. economy. In addition, a stronger U.S. dollar, which makes dollar investments more appealing as interest rates rise, might restrict exports, increasing the likelihood of a sharp slowdown in which the economy declines for two consecutive quarters.
Fears of a deteriorating economy and changes in consumer buying patterns have driven some high-flying internet darlings, such as Netflix and Peloton, to declare layoffs in recent months. Twitter and Meta have halted recruiting plans, and Amazon officials recently stated that the business was “overstaffed” following months of rapid hiring. In addition, national unemployment insurance claims rose to 218,000 last week, a four-month high but well below historical lows.
Nevertheless, headline inflation is at four-decade highs, posing a significant challenge for both the economy and the Biden administration. Higher food, gasoline, and housing prices are straining Americans’ finances and clouding their perspective of the economy. This week, gas prices reached an all-time high, with the national average reaching $4.57 per gallon. Moreover, according to the University of Michigan’s carefully regarded consumer sentiment index, Americans’ perceptions of their present circumstances and future aspirations have deteriorated dramatically in the last year.
Notwithstanding the grim outlook, Americans keep spending extravagantly. According to Commerce Department figures released this week, sales of apparel, automobiles, and furniture increased in April, adding to a 0.9 percent gain in overall retail trade from the previous month.
“Short term at least, the U.S. economy is holding up quite well despite the difficulties abroad and the high costs at the checkout stand,” said Beth Ann Bovino, senior U.S. economist at S&P Global. She predicts a 35% chance of a recession in the coming year. “People are still spending, and firms are still looking to recruit.” After that, however, there will undoubtedly be difficulties ahead. The Fed’s efforts should slow the economy. Still, it remains to be seen if they will also upset the apple cart. ” A day after warning that sluggish GDP and prices are “having stagflationary implications,” Secretary of the Treasury Janet L. Yellen said Thursday that the central bank could keep inflation under control without creating a recession. But she admitted that her capacity to do so would be far from certain.
“I believe there is a chance of a gentle landing.” It takes both skill and luck. “I hope so, but this is a tough economic scenario,” Yellen has said in Germany, noting economic disruptions from the war and Russian sanctions. “A lot is happening. It’s not a simple situation.” So if the U.S. avoids an economic downturn in the short to medium term, some economists believe that the rapid pace of rising prices, with an increase of 8.3 percent in the last year, as well as the persistent resource imbalances caused by the disease outbreak and policy reactions to it, could lead to an even more severe crisis in the long run.
“Buyers are shopping like crazy. As a result, firms will need to replenish their inventory, and many people are still streaming back into the job market, “said Jason Furman, a Harvard University economics professor. He served as a counselor during the Obama administration. “But all of this makes me concerned about one, two, or three years from now — because it may mean the Fed needs to hike rates even more, which might lead to an even greater recession later.” According to Moody’s analyst Zandi, rising gasoline and commodity prices due to disease outbreaks, supply chain snarls, and the situation in Ukraine has raised the prospect of an economic slowdown. He now believes the likelihood of a U.S. depression in the next two years is around 50%. “We’re almost there,” he remarked. “The real estate market is the next item to collapse; the issue is how badly.”
In April, new house building decreased, led by a decrease in single-family dwellings. In addition, according to data issued this week by the Bureau of the Census and the Department of Housing and Urban Development, building permits, which provide a window into future construction, have also fallen. “Homebuilder morale plummeted to its worst level when compared years in May,” Grant Thornton economist Yelena Maleyev stated in an analysis note. “Builders notice foot traffic and anticipate lower sales as the busy home-buying season begins.”
Our economy is already weakening as a result of this. Thousands of people have been let off by significant mortgage lenders throughout recent weeks due to diminishing demand for house loans and refinancing. Mortgage banker Kevin Retcher of Alexandria, Va., said a noticeable apprehension among potential house buyers. Refinances began to fall late last year, when the Fed signaled imminent rate hikes. Rising mortgage rates—already at 5.3 percent for just a fixed-rate 30-year mortgage, roughly twice the early 2021 rates—and sky-high housing prices have begun to dissuade purchasers in the months afterward, he added. In the last two weeks, at least three clients developed “cold feet” and backed out of approved contracts.
“There is a lot of anxiety out there,” said Reacher, president of First Meridian Mortgage. “It’s unusual for individuals to get agreements and then pull out, but that’s what’s occurred.” Other small companies report a drop in consumer demand as customers deal with growing expenses. While homeowners continue to pay for needs such as broken windows, Aaron Mulherin, owner of a glass repair firm in Marion, Iowa, begins to think twice about investing in luxuries such as customized showers. “Middle-class customers are beginning to hesitate,” Mulherin remarked. “Everything is becoming more costly, so they obtain an estimate and then put it off.”
