First on CNN: Next spring the economy will sink into a mild 1990-style recession, says Fitch

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Stubborn inflation and the US Federal Reserve’s gigantic rate hikes will push the US economy into a mild 1990-style recession starting in the spring, Fitch Ratings warned on Tuesday.

In a report first obtained by CNN, Fitch cut its US growth forecasts for this year and next because of one of the Fed’s most aggressive anti-inflation campaigns in history. US GDP is now expected to grow just 0.5% next year, compared to 1.5% in the company’s June forecast.

High inflation will weigh “too badly” on household income next year, Fitch said, and squeeze consumer spending enough to cause a downturn in the second quarter of 2023.

The bleak forecasts add to growing fears among investors, economists and business leaders that the world’s largest economy is on the verge of a recession – just 2.5 years after the last.

The silver lining, however, is that the next recession may not be nearly as destructive as the last two big ones.

“The US recession we expect is fairly mild,” said economists at Fitch Ratings.

The rating agency argued that the United States is entering this difficult time from a position of strength — particularly as consumers are less indebted than in the past.

“US household finances are much stronger now than they were in 2008, the banking system is healthier and there is little evidence of housing overbuild,” wrote economists at Fitch Ratings.

The Great Recession that began in late 2007 was the worst downturn since the Great Depression and nearly collapsed the financial system. The Covid recession that started in early 2020 sent the unemployment rate skyrocketing to almost 15%.

By contrast, Fitch Ratings sees the unemployment rate rising from just 3.5% today to 5.2% in 2024. That means millions of jobs will be lost, but not nearly as many as during the previous two recessions.

“Fitch Ratings expects very strong consumer balance sheets and the strongest labor market in decades to cushion the impact of a likely recession,” the report said.

Despite increasing fears of a recession, the labor market remains very tight as the supply of labor cannot keep up with the demand for labour. Layoffs are low, layoffs and vacancies are high.

According to Fitch, the next recession will likely be “broadly similar” to the one that began in July 1990 and ended in March 1991.

There are fascinating similarities between today and the early 1990s.

Much like today, the 1990 recession happened after the Fed struggled to fight inflation by rapidly raising interest rates.

This downturn was also preceded by a war-related oil shock. Back then, it was Iraq’s invasion of Kuwait that drove up gas and energy prices for Americans.

Today’s era of high energy prices is linked in large part to the Russian invasion of Ukraine, a conflict that has also pushed up food prices.

The 1990-1991 recession helped derail the political fortunes of then-President George HW Bush.

In the 1992 White House race, Arkansas Gov. Bill Clinton blamed Bush’s policies for the recession, and a Clinton strategist coined the phrase “It’s the economy, dumbass” to describe the importance of this issue to voters to highlight.

Recent polls show that voters today are also intensely focused on the state of the economy. In a New York Times poll released Monday, 44% of likely voters said economic concerns are the most important issue facing America — far more important than any other issue.

Inflation remains the biggest cloud hanging over the US economy. The high cost of living is eroding the value of workers’ paychecks and consumer confidence. Persistent inflation has also prompted the US Federal Reserve to slow down the economy by drastically raising interest rates.

That’s why economists in a separate Wall Street Journal poll put the probability of a recession in the next 12 months at 63%, the highest in more than two years.

JPMorgan Chase CEO Jamie Dimon told CNBC last week that a “very, very serious” mix of challenges is likely to result in a recession by the middle of next year.

According to Fitch Ratings, there is still a risk of a deeper recession than the one that began in 1990, in part because US companies have more debt relative to the size of the economy than they did 30 years ago. The report also cited the “highly uncertain” implications of the Fed’s efforts to shrink its $9 trillion balance sheet.

The biggest bright spot in the economy is the labor market, where the unemployment rate is at its lowest level since 1969. However, Fed officials expect the jobless rate to rise in the coming quarters and Bank of America is warning that the US economy will lose 175,000 jobs a month in the first quarter of next year.

Even White House officials are acknowledging that a downturn could be on the horizon.

President Joe Biden told CNN’s Jake Tapper last week a “mild recession” is possible, although he doesn’t expect it.

Transport Secretary Pete Buttigieg told ABC News over the weekend that a recession was “possible but not inevitable.”

Although the risks have increased significantly, a recession cannot be taken for granted.

Nobody, not even the Fed, knows exactly how this is all going to play out. It is impossible to say what will happen to a $23 trillion economy two years after a century pandemic and in the midst of war in Europe. There is no game book for this.