For many months, economic arrows have pointed to a likely slowdown in US economic growth, possibly portending a recession. A contracting economy looks likely as the latest US GDP report shows economic growth slowed to an annual rate of 1.1% in the first quarter, well below the previous quarter when the economy was steadily recovering, according to The Bureau of Economic Analysis 2.6% expanded. My economic analysis leads me to believe that the US economy may slip into recession as early as the third quarter of this year, but more likely a little later.
Given that recessions typically account for two or three quarters of economic contraction, I would expect the projected impending recession to last through mid-2024 and be followed by slower growth. This is nothing to worry about, but it does signal that businesses and consumers alike are reacting to the most visible culprit undermining the economy: persistent inflation.
Inflation has hurt consumer spending power, with retail sales in March 2023 down 1.2% from February, according to government data. Consumer spending is the single largest driver of the US economy and continues to be impacted by higher prices, with real personal spending showing no growth in March. If this continues, a recession will become almost inevitable, despite some signs that inflation has cooled somewhat.
the US economy and continues to be impacted by higher prices, with real personal spending showing no growth in March.Getty Images
Recession expectations are causing business investment to fall, falling by over 8% in real terms over the past year. Corporate inventories are still increasing, but at a declining rate compared to last year. Wages are still rising and putting upward pressure on production costs, albeit at a slower pace than last year.
For example, the Consumer Price Index (CPI) for March came in at 5% yoy, indicating inflation has fallen to a slower pace compared to 6% in February, and to a 40-year high of more than 9% in June 2022. But overall inflation is still running hot, well above the Federal Reserve’s long-term target of around 2%. In an attempt to control inflation, the Federal Reserve will have no choice but to continue on its way towards higher interest rates. This week the Fed hiked rates by 0.25 percentage point – the same move as in March. In a statement, the Federal Open Market Committee said it would “closely monitor incoming information and assess the impact on monetary policy,” but as Bloomberg reported, it did not repeat a line from its March statement that “additional policy tightening is appropriate.” could be .” This is interpreted by some observers as an indication that the Fed’s interest rate hikes could be over for the time being. The Fed may be more cautious about aggressively raising rates going forward as the economy slows and potentially heads into a recession.
Persistently high inflation, slowing spending, falling investment, interest rate hikes – this is a textbook scenario for a recession that is being closely watched by business leaders and global economists alike. In fact, business leaders, investors and consumers would do well to track a wide range of indicators to get a more complete picture of the US economy and how it is performing. Here’s a sample:
- The layoffs announced by several large companies — including 3M, AmazonAMZN, Meta (parent company of Facebook), Goldman Sachs, and others — tell a very different story from the job market narrative of low unemployment. Job cuts and a slowdown in hiring suggest labor market strength is weakening as a direct result of general economic pessimism and recession concerns.
- In recent years, nominal wages have risen and roughly kept pace with inflation. For example, in December 2022, median nominal wages increased by 6.1%, while the CPI increased by 6.4%. However, real wage growth (adjusted for inflation) is negative, meaning that overall US household income has been hit by inflation. As a result, household purchasing power has eroded, pointing to a recession.
- Those born in 2023 are entering a more difficult job market. St. Louis Fed data shows a graduate unemployment rate of 5.4% in March 2023, up from 4.2% in December 2022. This reality could dampen new graduate expectations for first jobs and salaries.
- The US housing market continues to slow, with existing home sales in March 2023 down 2.4% from February and 22% from a year earlier. This is mainly due to higher mortgage interest rates.
- Consumer sentiment has also deteriorated, with signs that retail shoppers are watching inflation and the broader economy with expectations of reining in their purchases. For example, a recent survey conducted by CNBC and Momentive found that US consumers “could buy less in more categories if inflation persists.” Significantly, this attitude has been found not only among low-income consumers, but also among those whose annual income is $100,000 or more.
Economic data of the non-traditional variety adds some texture. While anecdotal, they point to a more cautious consumer who will think twice before making a purchase.
- Discretionary spending has come under pressure as consumers pay more for necessities like groceries and gas. While discretionary shopping can be associated with luxury goods, the decline goes much deeper in that direction — for example, in housewares, according to Costco.
- McDonald’s CEO Christopher Kemczinski recently emphasized the importance of tracking the number of units or menu items per order. Or, as he was quoted as saying in a tweet, if someone “adds fries to their order.”
- Apparently it’s a global phenomenon: According to Reuters, rising prices are hurting the UK economy – and higher prices for seafood and potatoes could put up to a third of Britain’s fish and chip restaurants out of business.
Admittedly, predicting economic turning points is difficult. However, much of the latest economic data is pointing to a recession. Many use the strength of the labor market as a counter-argument; However, we are seeing a slowdown there as well. .While employers are still hiring, the rate of growth in hiring is flat while job vacancies are still high, vacancies are down, down 22% yoy in March and jobless claims are up Up 11% in April over a year earlier.
While a recession is not inevitable, consumers and business leaders cannot ignore its possibility. Consumers need to rein in spending, particularly on credit, while business leaders should seek to reduce hiring and other spending, particularly capital spending.
I am a Clinical Professor and Vice Chair of Finance at the Kellogg School of Management at Northwestern University. I write and specialize in the study of financial markets and emerging markets. I frequently discuss trade wars, tariffs, and corporate finance.
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