The US economy may be heading for a recession next year, as persistently high inflation and an increasingly hawkish Federal Reserve weigh on growth.
Greg Daco, chief economist at EY-Parthenon, warned in a new analyst note that the odds of an economic downturn in the US over the next year are somewhere between 35% and 40%.
There is an even greater risk of a global downturn.
“A recession in the United States is unlikely in the very short term, but there are several uncertainties on the horizon,”[ads1]; Daco wrote. “While I place the odds of a US recession somewhere around 35-40% over the next 12 months, the odds of a significant global growth decline are close to 100% over the next six months.”
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While the US economy remains strong in the meantime, “cracks are beginning to appear in the foundations,” he wrote. Sky-high inflation, rising interest rates and depressed financial markets are likely to weigh on consumption in the coming months. Consumption expenditure accounts for about two-thirds of gross domestic product, the broadest target for goods and services produced in the nation.
“With the Fed tightening monetary policy with greater determination and the global economic outlook darkening, the US economy will grow more receptive to a downturn in the coming months,” Daco wrote.
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.
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The analysis comes amid growing fears on Wall Street that the Fed could pull the economy into a recession as it tries to tame inflation, which rose by 8.3% in April, near a 40-year high. Bank of America, as well as Fannie Mae and Deutsche Bank, are among the Wall Street companies that predict a decline in the next two years, along with former Fed Chairman Ben Bernanke.
“The Fed is trying to thread the needle while wearing boxing gloves and mouth protection, which reduces the degree of freedom to act without causing harm to the real economy,” said RSM chief economist Joe Brusuelas, who has questioned whether the central bank will be able to achieve a soft landing.
Politicians raised the reference rate by 50 basis points earlier this month for the first time in two decades, and have signaled that several interest rate increases of the same size are on the table at upcoming meetings as they rush to catch up with inflation.
Fed Chairman Jerome Powell has acknowledged that there may be some “pain” associated with reducing inflation and curbing demand, but has pushed back against the notion of an impending recession, identifying the labor market and strong consumer spending as bright spots in the economy. Nevertheless, he has warned that a soft landing is not guaranteed.
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“It’s going to be a challenging task, and it’s been made more challenging in the last couple of months due to global events,” Powell said Wednesday during a Wall Street Journal live event, referring to the Ukraine war and the COVID shutdowns. in China.
But he added that “there are a number of plausible ways to have a soft or soft landing. Our job is not to hinder the odds, it is to try to achieve it.”