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The US economy may be heading for recession next year, say banks and economists

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The US economy may be heading for a recession next year, according to growing warnings from banks and economists, as a sudden onslaught of economic pessimism hammers the financial markets that had expected sustained economic momentum.

Although large parts of the economy – including the labor market and consumer spending – remain robust, there are growing concerns that rising borrowing costs for consumers and businesses, after years of near-zero interest rates, could lead to a sudden decline. The Federal Reserve has raised interest rates by 0.75 percentage points so far this year, while officials signal that more aggressive upswings may be needed to cool the economy. Continued uncertainty from the coronavirus pandemic and Russia’s invasion of Ukraine increase unrest.

“The risk of rising is high – uncomfortably high – and rising,” said Mark Zandi, chief economist at Moody’s Analytics. “For the economy to navigate without suffering a downturn, we need some very good policy formulation from the Fed and a little luck.”

Nations are moving to tackle inflation, which increases the risk to the global economy

Just this week, former Goldman Sachs boss Lloyd Blankfein warned of a “very, very high risk” of recession; Wells Fargo CEO Charlie Scharf said there was no doubt the US economy was heading for a downturn; and former central bank governor Ben Bernanke warned that the country may be ready for “stagflation” – a declining economy combined with high inflation.

These concerns come amid new chunks of data pointing to economic cooling, especially in interest rate sensitive sectors that already feel the bulk of the Fed’s promise to continue tightening monetary conditions. Construction of new homes declined in April. Demand for mortgages continues to decline.

Some of the country’s largest and most influential traders reported disappointing sales and profits this week due to higher costs and overcrowded inventory problems, designed to avoid supply chain disruptions, and set in motion a stock market merger. Walmart’s shares plunged more than 11 percent on Tuesday, the worst loss in a single day in 35 years. On Wednesday, Target’s shares fell 26 percent, following an astonishing 52 percent drop in quarterly profits, which executives attributed in part to a cooling demand for large tickets such as TVs, kitchen appliances and outdoor furniture.

The Fed raises interest rates by half a percentage point in the fight against inflation

“Although we expected a decline in stimulus in these categories … we did not anticipate the extent of that shift,” Brian Cornell, Target’s CEO, said in an earnings interview on Wednesday. “When we talk to our guests, they often express concerns about a range of rapidly changing conditions, from geopolitics to the high and persistent inflation they have experienced.”

This week, Goldman Sachs revised down its forecast for second-quarter US economic growth to 2.5 percent, citing higher prices and continued supply chain disruptions. It follows one unexpected decline in the first three months of 2022, when the economy shrank 1.4 percent, mainly due to an imbalance in trade and a fall in purchases of goods.

The economy shrinks 1.4% in the first three months of the year, which increases fears of recession

International unrest, including the risk of recession in Europe and China, dampens the outlook for the US economy. And a strengthening US dollar – as interest rate hikes make dollar investment more attractive – could dampen exports, and increase the chances of a technical recession in which the economy contracts two quarters in a row.

Fears of a deteriorating economy as well as changes in consumption habits for pandemic consumption have led to a number of high-flying tech lovers, including Netflix and Peloton, announcing layoffs in recent weeks. Twitter and Meta have put their hiring plans on hold, while Amazon executives recently said the company was “overstaffed” after months of quick hiring.

Meanwhile, inflation, which is still close to 40-year highs, has become a key challenge for both the economy and the Biden administration. Higher prices for basic items such as food, energy and housing strain US budgets and cloud their view of the economy. Gas prices rose to another record high this week, averaging $ 4.57 per gallon nationwide. A closely monitored consumer sentiment index from the University of Michigan shows that Americans’ views on their current economy and future expectations have fallen sharply over the past year.

Despite the bleak prospects, Americans continue to spend heartfelt money. Sales of clothing, cars and furniture rose in April, contributing to a 0.9 percent increase in total retail sales from a month earlier, according to data from the Ministry of Commerce published this week.

“In the near term, the US economy is doing pretty well despite trouble abroad and high cash prices,” said Beth Ann Bovino, chief economist at S&P Global, who said there was a 35 percent risk of recession next year. . “People are spending money, companies are still trying to hire. But there are certainly challenges ahead. The Fed’s actions will slow down the economy, but the question is whether they can also overturn the apple cart.”

Although the US is averting a short-term recession, some economists say that the inflation rate is clean, with prices up 8.3 percent over the past year, and the persistent imbalance between supply and demand caused by the pandemic, and the political reactions. to that, snowballing can enter an even more serious crisis along the line.

“Consumers are going crazy, businesses will need to rebuild inventory, and many workers are still flowing back into the job market,” said Jason Furman, an economics professor at Harvard University who served as an adviser to the Obama administration. “But all of this makes me worry about one or two or three years ahead – because it could mean the Fed has to raise interest rates even more, and it could mean you create an even bigger recession later.”

Zandi, from Moody’s, said that sky-high gas and commodity prices from the tightening of the pandemic-related supply chain and the Ukraine war have added to the specter of an economic downturn. He now sets the odds of a US recession in the next 24 months at around 50 percent.

“We travel very close to the edge,” he said. The housing market is the next thing to roll over; The question is just how difficult. “

Construction of new homes fell in April, led by a decline in detached houses. Building permits, which provide an insight into future construction, also declined, according to data published this week by the Census Bureau and the Department of Housing and Urban Development.

“Sentiment from homebuilders fell to its lowest level in two years in May,” Grant Thornton economist Yelena Maleyev said in an analyst note. “Builders see less foot traffic and expect sales to be weaker as we enter the busy home buying season.”

Mortgage rates are rising, but the hot housing market is cooling slowly

That softening is already rippling through the economy. Major mortgage lenders across the country, including Wells Fargo and, have laid off thousands in recent weeks as a result of declining mortgage demand and refinancing.

In Alexandria, Va., Mortgage lender Kevin Retcher said there is a noticeable dirt among potential home buyers. Refinancing began to fall at the end of last year, around the time the Fed began to signal forthcoming rate hikes. In recent months, a combination of rising mortgage rates – now at 5.3 percent for a 30-year fixed-rate mortgage, almost double the levels in early 2021 – and sky-high house prices have begun to deter buyers, he said. At least three clients have had “cold feet” and withdrawn from ratified contracts in the last two weeks, he added.

“There’s an extreme sense of nervousness out there,” said Retcher, president of First Meridian Mortgage. “It’s rare for people to win contracts and then retire, but that’s what has happened.”

Other types of small businesses say that they are also seeing a decline in consumer demand, as customers are struggling with rising costs. Aaron Mulherin, who owns a glass repair company in Marion, Iowa, said that while homeowners continue to search for necessities like fixing broken windows, they are starting to think twice about spending on luxury like custom showers.

“Average middle-class consumers are beginning to hesitate,” Mulherin said. “Everything gets more expensive, so they get an estimate and postpone it.”

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