Is a recession coming? Signs that the economy is starting to crack

Wall Street is increasingly convinced that the Federal Reserve will drag the economy into a recession with its war on inflation.

Bank of America, Deutsche Bank, Wells Fargo and Goldman Sachs are among the most notable companies predicting the possibility of a downturn over the next two years, as the US Federal Reserve moves to tighten monetary policy aggressively to cool consumer demand and bring inflation back to the target of 2%.

There is growing evidence that banks may be right, even though recessions are notoriously difficult to predict.

Is a recession coming?  Signs that the economy is starting to crack

A man trades in a Safeway grocery store in Annapolis, Maryland, May 16, 2022, as Americans prepare for summer sticker shocks as inflation continues to grow. (JIM WATSON / AFP via Getty Images / Getty Images)

Here’s a closer look at some signs that the economy is starting to shatter.

GDP shrank unexpectedly in the first quarter

Economic growth in the United States is already slowing.

The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since spring 2020, when the economy was still deep in the COVID-induced recession.


GDP fell by 1.4% on an annual basis in the three-month period from January to March, according to the government’s first reading of the data. It was strongly below Refinitiv economists’ expectations of a 1.1% growth, suggesting that dark clouds are looming on the horizon.

“The shock of GDP is a wake-up call that the economy is not as strong as we all thought,” said Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance. “It is possible that GDP will be revised higher next month, as this is only the first release and there will be two revisions, but it is a warning sign.”

The stock market is plummeting

Traders work on the floor of the New York Stock Exchange (NYSE) on May 18, 2022 in New York City. (Spencer Platt / Getty Images / Getty Images)

Recessions are technically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, declining income and declining retail sales.

The market is falling

The markets have been wiped out in extensive sales this month as high inflation, rising interest rates and the risk of a recession have rattled investors.

Stocks in this article

$ 11354.617127

-33.88 (-0.30%)

The benchmark index S&P 500 fell more than 20% this year, officially into a bear market Friday afternoon for the first time since March 2020, at the start of the COVID-19 pandemic. The Nasdaq Composite, meanwhile, is already deep in its own bear market, while the Dow Jones Industrial Average has also plunged for nine weeks in a row.

Fed tightening

The Federal Reserve hopes to achieve the rarest economic achievements when it enters full-fledged anti-inflationary mode: to cool consumer demand enough so that prices stop rising, without crushing it so much that it throws the country into a recession.

Although Fed politicians expect to find the elusive sweet spot – known as a soft landing – history shows that the US Federal Reserve often struggles to succeed in narrowing the gap between tightening policy and maintaining economic growth.

Recent research by Alan Blinder, a former deputy chairman of the Federal Reserve Board and a Princeton economist, identified 11 tightening cycles since 1965, eight of which were followed by recessions. However, this does not mean that a severe recession is guaranteed: there were five cases of either very mild recessions where GDP fell less than 1%, or there was no economic downturn at all.


The Fed’s policy makers raised the reference rate for federal funds by half a point earlier this month, and chairman Jerome Powell has almost promised that two, equal increases are on the table at the upcoming meetings in June and July. He has reiterated this sentiment while the Fed is trying to catch up with current inflation and bring it down to the 2% target, promising that the Fed will raise interest rates as high as necessary to cool prices.

In this archive photo from January 29, 2020, Federal Reserve Leader Jerome Powell takes a break during a press conference in Washington. (AP Photo / Manuel Balce Ceneta, File / AP Newsroom)

“What we need to see is that inflation falls in a clear and convincing way, and we will continue to push until we see it,” he said Tuesday during a live event in the Wall Street Journal. “If it involves going beyond widely understood levels of neutrality, we will not hesitate at all to do so.”

Higher interest rates tend to create higher interest rates on consumer and corporate loans, which slows down the economy by forcing employers to cut spending.

“The Fed is trying to thread the needle while wearing boxing gloves and mouth protection, which reduces the degree of freedom to trade without harming the real economy,” said RSM chief economist Joe Brusuelas, who has questioned whether the central bank will be able to achieve a soft landing. .


The closely monitored consumer price index in April should show that sky-high inflation had reached its peak and that prices were beginning to moderate.

Instead, prices actually rose more than expected in April, indicating that inflation will persist at high levels for some time: While the Ministry of Labor reported that the overall inflation rate actually moderated for the first time this month, the meter continued to rise by 8.3%. a markedly high pace that is close to 40 years of height.

Food, clothing and gasoline prices are rising and hitting Americans' wallets.

Fruit will be displayed in a store on May 12, 2022 in New York City. (Spencer Platt / Getty Images / Getty Images)

At the same time, another meter that measures prices excluding food and energy – more volatile measurements – jumped by 0.6%, surpassing all estimates.


“This is another upward inflation surprise and suggests that the slowdown will be painstakingly slow,” said Seema Shah, chief strategist at Principal Global Investors. “The focus will soon begin to shift from where inflation peaked to where it peaks, and we fear it will pile up at an uncomfortably high level for the Fed.”

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