The cracks in the U.S. economy began to show as a recession warning mount

(Bloomberg) – The late Nobel laureate economist Paul Samuelson once joked that Wall Street had predicted nine of the last five recessions. This time the stock market may be right.

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The U.S. economy is beginning to show signs of pressure under the weight of decades of high inflation and rising interest rates – increasing the risk of a recession.

Investors are taking note this week as equity boils down, as earnings scandals from retailers such as Walmart Inc. and Target Corporation add to the growing fear. And the trend could create problems for President Joe Biden, whose Democrats must secure a slim congressional majority in the mid-November vote.

Overwhelmed by the high cost of gasoline and food, American families are borrowing record amounts to help meet the end. Hang on by the high mortgage rates, homebuilders are turning the gloom about the outlook. Smaller companies are also struggling with rising business costs and difficulties in hiring or retaining workers.

Ethan Harris, head of global economics research at Bank of America Corporation, said, “I don’t think you can get the economy off to a fairly good start right now, where inflation is down but unemployment is not up.” We have either a weak economy or a recession. ”

Wall Street economists are forecasting their growth in response to the tightening of the financial situation led by an inflation-fighting Federal Reserve. The last six months have seen the fall in equity prices, high interest rates and a strong dollar.

‘Uncomfortable’ disagreement

Most economists are betting that the economy has enough momentum – and there is a pressure demand for automobiles, housing and travel, thanks to the epidemic-created savings – to carry it by the end of this year without stumbling. This is next year and beyond where they see even greater danger. And yet, the consensus is for slowness rather than slowness.

In a May 18 note, Michael Ferrell, chief U.S. economist at JPMorgan Chase & Co., said he now sees growth slowing from 2.4% in the second half of this year to 1% in the second half of 2023 as Fed growth slows demand, as they intend. Goldman Sachs Group Inc., led by Jan Hatzius. Economists also downgraded their outlook last week.

But a growing number of analysts are warning that there could be some worse stores.

Mark Jandy, chief economist at Moody’s Analytics, said in a May 16 note, “We anticipate that the recession will begin in the next 12 months and that there will be an uncomfortable near-pair recession in the next 24 months.” .

Much depends on what happens to inflation and the Fed. If inflation stays above the central bank’s 2% target – more than 3 times now – policymakers may be forced to respond by pushing it down, pushing the economy into recession.

The Fed raised interest rates by 50 basis points earlier this month, and Chair Jerome Powell indicated he was looking to take similar steps at his meetings in June and July.

The Fed chief acknowledged for the first time on May 17 that the pivot of the central bank’s tough policy could lead to higher unemployment, although he argued that it would not necessarily hit the hammer. “You can still have a very strong labor market if unemployment stays a few ticks,” Powell said at an event in the Wall Street Journal.

Housing frontline

Powell also acknowledged that the central bank’s ability to pull off a “soft or soft” downturn in the economy could depend on events beyond its control. Russia’s aggression in Ukraine has pushed up food and energy prices and stunned global growth. China’s strict Covid Zero policy is hampering the world’s second-largest economy and further weakening the supply chain.

History is not for the Fed. After examining 15 Fed tightening cycles since 1950, Bloomberg Economics chief U.S. economist Anna Wang concludes that “the central bank will be pressured to avoid a recession and may have to start a steeper growth cycle than current market expectations.”

The housing market is at the forefront of the Fed’s drive to slow growth by raising credit costs. Since the end of last year, mortgage rates have risen more than two percentage points, the fastest run-up in nearly four decades.

Jerry Conter, chairman of the National Association of Home Builders, said “housing leads the business cycle and housing is moving slowly,” after industry groups reported that confidence among its members had declined for the fifth month in a row in May, the lowest since the onset of the epidemic.

Doug Duncan, chief economist at Fannie Mae, said he expects the economy to plunge into a moderate recession in the second half of next year due to the Fed rate-rise bite. He sees unemployment rise to 4.4% in 2023 – the current rate from 3.6%, which is close to the 50-year low.

William Dunkelberg, chief economist at the National Federation of Independent Business, also thinks the recession is coming. Most small business owners surveyed by the NFIB in April expect conditions to deteriorate for their companies in the next six months, the worst outlook in 48 years. About one-third say inflation is their biggest headache, the highest since 1980.

Inflation is also high for families – and consumer sentiment measured by the University of Michigan is one of the main reasons for the lows since 2011.

Concerned neo-hippies and their global warming, i’ll tell ya.

He told Bloomberg Television on May 17 that consumer debt “supports short-term spending but is not going to be a sustainable source of spending growth in the end.”

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