Most economists say a recession is likely next year. But so far this dire warning has been accompanied by the silver lining: Any setback will almost certainly be mild.
But in recent weeks, they say, the odds of a more severe decline that could mean millions more job losses have increased.
Some economists blame a Federal Reserve for aggressively raising interest rates with a determined mission to tame high inflation, even if it risks recession.
“If the Fed keeps raising rates, it could cause more losses,” says Bob Schwartz, senior economist at Oxford Economics.
Economists also point to the US job market resilient enough to intensify economic woes in Europe, COVID-19 lockdowns in China that could escalate this winter, a sharp housing slowdown in the US, and even bolder moves by the Fed, among other factors. .
Will there be a recession in 2022?
The most likely scenario is a modest recession lasting six to nine months. Eighty-eight percent of economists predict a downturn will be modest, according to a survey by Wolters Kluwer Blue Chip Economic Indicators earlier this month. However, this fell from 95% in October. This means that the share of apocalyptic heralds has risen from 5% to 12% in just a few weeks.
What is a mild recession?
Wells Fargo Chief Economist Jay Bryson said a moderate recession would cost the economy 1.8 percent if the nation’s gross domestic product, or economic output, fell 1.2 percent and the unemployment rate rose from 3.5 percent, a 50-year low, to 5.4 percent. It is estimated that it could cost millions of people. .
Bryson and Joseph LaVorgna, chief economist at SMBC Capital Markets, say this outcome will be roughly similar to the recessions of the early 1990s and early 2000s and less severe than the average recession, where GDP fell 1.6%.
Also, from the Great Recession of 2007-09 (about 4% drop in production and loss of 8.7 million jobs) and the COVID-19 recession of 2020 (about 10% drop in output and loss of 22 million jobs).
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What is a severe recession?
A severe recession could mean 3 to 4 million job losses. Bryson says there is a 2% to 2.5% decline in GDP and an unemployment rate of 7%.
He says such a slump will likely last longer, perhaps a year or 15 months, as a violent cycle continues, as widespread layoffs lead to less consumer spending, which in turn encourages more layoffs.
Most economists predict a slight decline as consumers and companies are financially well off and therefore have at least some resources to continue spending even if the economy weakens and some people lose their jobs.. According to the Federal Reserve, household debt has grown to 9.6% of disposable personal income in the second quarter, up from 8.4% at the beginning of last year, but is still below its peak of 13.2% at the end of 2007 and the average of the past 40 years according to the Federal Reserve. quite below.
Also, according to Moody’s Analytics, consumers still have about $2 trillion in pandemic-related savings, but that’s down from last year’s peak of $2.6 trillion.
Meanwhile, non-financial companies’ outstanding debt hit a record $12.5 trillion in the second quarter, but only accounted for 3.7% of corporate profits, up from 4.8% at the end of 2019, according to the Fed and Oxford Economics. Despite sharply rising interest rates, Bryson says many companies are refinancing their debt when rates are low. Seventy percent will not reset to new rates for 12 months or more.
Also, Pantheon Macroeconomics chief economist Ian Shepherdson says the economy is not beset by imbalances, as it was during the commercial real estate crisis of the early 1990s, the dot com meltdown of 2000, and the housing collapse of the late 2000s.
Still, a few emerging forces can turn a mild recession into a severe one:
Even bigger Fed rate hikes
The Fed has raised its key short-term interest rate from near zero to the range of 3% to 3.25% this year – its most aggressive campaign since 1980 – and has signaled it will raise another 1.25 percentage points by the end. year. Futures markets expect another half-point gain in early 2023, bringing it to a level designed to restrain economic growth.
Despite heightened recession risks, the central bank has repeatedly ramped up the rate hikes, citing inflation that set a new 40-year high earlier this year and has since hovered just below that level.
If inflation continues to ease more slowly than expected, the Fed could push rates higher and keep them there even as the economy falters.
“If they raise interest rates to 5% or more, it could do real damage to the economy,” Schwartz says.
Schwartz and LaVorgna say the Fed’s rate hikes are already clogging the housing market as 30-year fixed mortgage rates double this year to nearly 7%, and will increasingly reduce car purchases, credit card use and business investment.
What’s more, LaVorgna says it’s the first time the Fed has hiked rates even as the economy slows sharply.
“If they do what they say they will do, we will have a deep recession,” LaVorgna said, adding that he believes Fed officials will change course before that happens.
Is the job market too strong?
Job deficits fell to a still strong level from a record close to 11.2 million in July. 10.1 million next month. Due to persistent labor shortages, many companies are reluctant to lay off workers or cut hiring sharply, for fear that they will not be able to find employees once the economy recovers.
Normally, a flexible job market helps protect an economy against recession. Now, however, it will likely spur the Fed to continue raising rates aggressively to curb wage increases that have helped drive inflation. This can increase the risk of a deeper fall
“They are trying to get steam out of the labor market without causing a recession,” Bryson says. “This is a really difficult thing to do.”
A Deutsche Bank study this week says the Fed will need to raise its key rate enough to bring unemployment closer to 6% to keep inflation close to its 2% target by the end of 2024.
Will housing prices decrease in 2023?
Existing home sales fell for the eighth consecutive month in September. Housing prices fell for the second month in a row in August for the first time since 2011, according to the Federal Housing Finance Agency’s Housing Price Index.
Schwartz said that housing built mostly through new home construction accounts for only 4.6% of the economy, adding that he is not worried about the industry contributing to a serious recession. Also, the market is unlike anything it was in 2007, when banks made millions of subprime loans to unskilled borrowers, leading to massive foreclosures and layoffs.
But EY-Parthenon’s chief economist Gregory Daco says housing wealth makes up about half of total household net worth. It expects home prices to rise to 6% by mid-2023.
“Rapidly falling prices could reduce household consumption and amplify the recession dynamics expected to grip the economy in 2023,” Daco said in a note to customers.
Could a deep recession in Europe make fun of the US?
Goldman Sachs now expects the winter weather to trigger a more severe European crisis driven by rising energy prices linked to Russia’s war with Ukraine.
According to FactSet, S&P 500 companies derive about 14% of their revenue from sales in Europe. Bryson worries that a deeper downturn will further adversely affect the outlook and investments of US companies.
Could COVID in China Affect the US?
Chinese cities are already implementing quarantines to prevent the spread of COVID-19. Bryson worries these efforts could intensify if a harsh winter triggers more cases, worsening supply chain bottlenecks for US companies. These growls abated, reduced product shortages, and raised hopes for a reduction in inflation. .
Could corporate debt be a problem?
Oren Klachkin, leading US economist at Oxford, says that while corporate debt levels are manageable, a slowing economy can hurt revenue growth and leave companies with less cash to pay. FactSet said S&P 500 earnings are projected to rise 1.5% for the third quarter, the slowest since 2020.
This could further strain business investment and cause US banks to further restrict lending.
“This is a potential catalyst for more severe financial and economic stress,” says Klachkin.
What is the risk of an unforeseen financial crisis?
Sharply rising interest rates, Schwartz says, could lead to crises that weren’t on anyone’s radar, like the explosion of the mortgage-related derivatives market in 2007.
It could be a foreign country’s debt crisis or an overly leveraged hedge fund as interest rates rise and a strong dollar makes it more difficult to pay back, he says.
“This is unknown,” Bryson says.
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