June 19, 2022

Is the US Economy Headed for a Recession?

"Is the US economy headed for a recession?" is a question many people, myself included, are asking these days. In a whitepaper titled with the same question, The Economist Intelligence Unit (The EIU) says "Some economic warning signs started to flash in early 2022, raising concerns that the US could be headed for a recession" Furthermore, "The US economy was one of the first to rebound from the negative effects of the covid-19 pandemic, with strong residential investment and consumer spending boosting real GDP by 5.7% in 2021. However, positive economic momentum has started to ebb in recent months. Real GDP contracted at an annualized rate of 1.5% in the first quarter of 2022 as the war in Ukraine sent energy prices soaring and China's zero-covid policy exacerbated existing supply-chain issues."

What is more, The EIU explains "that economic growth in the US will slow sharply over the course of 2022 and 2023, owing to stubbornly high inflation, rising interest rates and stalling growth elsewhere." The UK-based company expects "consumer demand to be resilient enough to avoid an outright recession, thanks in part to the tight labor market and strong household balance sheets. However, this does not mean that a recession is completely off the cards."

The whitepaper explores the three main downside risks to the US economic outlook, and identifies potential triggers for a recession:
    Risk #1: Second wave of inflation

    Risk scenario: Unforeseen factors prompt another spike in inflation—from an already high level—in late 2022 or early 2023, causing household spending to contract.
    Possible triggers: Double-digit increases in the consumer price index for two consecutive months (or more) in the second half of 2022.

    Risk #2: Overly-aggressive Fed

    Risk scenario: The Fed overestimates the strength of consumer spending in the summer and raises interest rates more aggressively than we currently expect, causing consumer spending to crater in the autumn.
    Possible triggers: Combined interest-rate hikes of 150 basis points or more in June and July, coupled with a further decline in consumer confidence measures.

    Risk #3: Asset price collapse

    Risk scenario: A combination of rising interest rates, high inflation, concerns over the economic fallout from the war in Ukraine, and worsening business and consumer sentiment spook US markets and cause asset prices to crash.
    Possible triggers: The US bear market deepens. US stock market indices fall by 40% or more from their recent peak by July as a result of one or more of the factors above, without changes in monetary policy to compensate.

    Additional key points from the report include:
    • Price pressures to wane in the second half of the year as energy prices stabilize and supply chain constraints begin to ease. However, if inflation were to jump later in 2022, after rising interest rates and falling real wages, an outright contraction in consumer spending could occur.
    • The Fed will raise interest rates by a total of 300 basis points. A surge in consumer spending in the summer, coupled with still-high inflation, could potentially push the Fed to tighten more aggressively than The EIU currently expects, which would likely be too much for households to bear.
    • US stock prices are expected to cool in the second half of 2022. The Fed will maintain a gradual approach to tightening, helping to prevent a severe collapse in asset prices that would exacerbate the drop in consumer spending.

    While it is difficult to predict the future direction of the US economy, The EIU's paper provides valuable information on which risks to monitor. What efforts are you taking to mitigate the impact of a possible recession?

    Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

    No comments:

    Post a Comment