Stubborn inflation and the Federal Reserve’s big rate hikes will push the US economy into a mild 1990s-style recession starting in the spring, Fitch Ratings warned on Tuesday.
In a report first obtained by CNN, Fitch cut its US growth forecasts for this year and next due to one of the most aggressive anti-inflation campaigns by the Fed in history. US GDP is now expected to grow by just 0.5% next year, down from 1.5% in the firm’s June forecast.
High inflation will “show too much of a drag” on household incomes next year, Fitch said, reducing consumer spending to the point of causing a contraction in the second quarter of 2023.
Fitch, one of the world’s top three credit rating agencies, assesses the ability of companies and nations around the world to repay their debts, providing important guidance for investors.
The gloomy forecast adds to growing fears among investors, economists and business leaders that the world’s largest economy is on the brink of a recession — just 2.5 years after the last one.
The silver lining, however, is that the next recession may not be nearly as devastating as the last two major ones.
“The US recession we expect is quite mild,” said economists at Fitch Ratings.
The credit rating firm argued that the US is entering this difficult period from a position of strength – particularly because consumers are not as heavily indebted as in the past.
“The US household economy is much stronger now than it was in 2008, the banking system is healthier and there is little evidence of overbuilding in the housing market,” Fitch Ratings economists wrote.
The Great Recession, which began in late 2007, was the worst downturn since the Great Depression and nearly led to the collapse of the financial system. The Covid recession, which started in early 2020, caused unemployment to skyrocket to almost 15%.
In contrast, Fitch Ratings sees unemployment rising from just 3.5% today to 5.2% in 2024. That means the loss of millions of jobs, but not nearly as many as those lost during the previous two recessions.
“Fitch Ratings expects a very strong consumer balance sheet and the strongest labor market in decades to cushion the impact of a likely recession,” the report said.
Despite growing recession fears, the labor market remains very tight, with the supply of workers unable to keep pace with labor demand. There are few redundancies, quits and vacancies are high.
Fitch says the next recession is likely to be “roughly similar” to the one that started in July 1990 and ended in March 1991.
There are exciting similarities between today and the early 1990s.
Just like today, the 1990 recession occurred after the Fed tried to fight inflation by rapidly raising interest rates.
Similarly, that downturn was preceded by a war-driven oil shock. Back then, it was Iraq’s invasion of Kuwait that drove up gasoline and energy prices for Americans.
Today’s period of high energy prices is largely linked to Russia’s invasion of Ukraine, a conflict that has also raised food prices.
The 1990-1991 recession helped judge the political fortunes of then-President George HW Bush.
In the 1992 race for the White House, Arkansas Governor Bill Clinton blamed Bush policies for the recession, and a Clinton strategist coined the phrase “It’s the economy, stupid,” highlighting the importance of this issue to voters.
Recent polls indicate that voters today are also intensely focused on the state of the economy. In a New York Times poll published Monday, 44% of likely voters said economic concerns are the most important issue facing America — far higher than any other issue.
Inflation remains the biggest cloud hanging over the US economy. The high cost of living is eroding the value of workers’ paychecks and weakening consumer confidence. Persistent inflation has also prompted the Federal Reserve to put the brakes on the economy by raising interest rates dramatically.
That’s why economists in a separate survey, from The Wall Street Journal, put the chance of a recession in the next 12 months at 63%, the highest level in more than two years.
Jamie Dimon, CEO of JPMorgan Chase, told CNBC last week that a “very, very severe” mix of challenges is likely to cause a recession by the middle of next year.
Fitch Ratings said there remains a risk of a deeper recession than the one that began in 1990, in part because U.S. companies carry more debt relative to the size of the economy than 30 years ago. The report also cited the “highly uncertain” impact of the Fed’s efforts to shrink its $9 trillion balance sheet.
The biggest bright spot in the economy is the labor market, where the unemployment rate is tied for the lowest level since 1969. However, Fed officials expect the unemployment rate to rise in the coming quarters, and Bank of America warns that the US economy will lose 175,000 jobs a month in during the first quarter of next year.
Even White House officials admit that a downturn could be in the cards.
President Joe Biden told CNN’s Jake Tapper last week a “small recession” is possible, though he doesn’t expect it.
Transportation Secretary Pete Buttigieg told ABC News over the weekend that a recession is “possible, but not inevitable.”
Although the risk has clearly increased, a recession is not a foregone conclusion.
No one, not even the Fed, knows exactly how all this will play out. It is impossible to say what will happen to a $23 trillion economy two years after a once-in-a-century pandemic and in the midst of a war in Europe. There is no playbook for this.