High expectations of recession in the US

Economists are forecasting an economic downturn this year as the US Federal Reserve (Fed) raised interest rates to combat inflation.

Economists surveyed by Bloomberg believe that subprime loans will have a negative impact on corporate investment, hiring and consumer spending, resulting in a contraction of gross domestic product (GDP) for the second quarter. Some economists forecast that the damage to the economy will be milder.

According to the results of the survey carried out by Bloomberg in December and in which 38 economists participated, it was stated that the probability of a recession is 70 percent. Median forecasts projected an annual decline of 0.7 percent in the second quarter, while GDP could decline by an average of 0.3 percent in 2023.

WAITING FOR CRITICAL DATA

GDP figures for the fourth quarter of 2022, due to be released tomorrow, may further complicate the picture by showing that consumer spending, the main driver of the economy, remains largely resilient, but businesses are in trouble. .

If a recession is defined as ‘two-quarters of a consecutive GDP contraction’ for many countries, the US disagrees with this assessment. But acceptance of the recession may come when it is widely recognized by Wall Street.

DATA GIVES MIXED SIGNAL

On the other hand, despite the layoffs, the overall strength of the US job market continues to surprise economists. In other parts of the economy, however, cracks are showing. In December, retail sales registered the biggest drop in a year, while indicators of manufacturing activity contracted in the last quarter of 2022.

One of the important recession indicators is the inversion of the yield curve. The fact that short-term US Treasury bond yields exceed long-term bond yields is interpreted by economists as a sign of recession. This had happened before in the 1970s, after which the economy went into recession.

‘I’m afraid of the recession’

James Knightley, ING’s chief international economist, said: “The data has turned negative across the board for several months. This indicates that things will only get worse. That’s why I’m so afraid of a recession,” he said.

US CEOs surveyed by the Conference Board research organization also announced that they expect a recession this year. Bank of America CEO Brian Moynihan expects a mild recession, while Goldman Sachs CEO David Solomon said a recession is likely this year. JPMorgan Chase, the largest bank in the US, has set aside more than $1 billion to prepare for potential losses.