Despite optimistic economic data and the belief that a recession has been avoided, some economists and analysts believe that a recession is still on the horizon due to factors such as the impact of interest rate hikes and lagged effects of inflation and tighter lending standards.
The Federal Reserve faces new questions as the U.S. economy continues to perform well despite high interest rates, prompting economists to believe a "soft landing" is possible, with optimism rising for an acceleration of growth and a more sustainable post-pandemic economy.
Despite the optimism from some economists and Wall Street experts, economist Oren Klachkin believes that elevated interest rates, restrictive Federal Reserve policy, and tight lending standards will lead to a mild recession in late 2023 due to decreased consumer spending and slow hiring, although he acknowledges that the definition of a recession may not be met due to some industries thriving while others struggle.
Recession fears return as a key business survey shows a significant contraction in the UK economy, signaling the detrimental effects of interest rate rises on businesses and heightening the risk of a renewed economic downturn.
The US economy is expected to slow in the coming months due to the Federal Reserve's efforts to combat inflation, which could lead to softer consumer spending and a decrease in stock market returns. Additionally, the resumption of student loan payments in October and the American consumer's credit card addiction pose further uncertainties for the economy. Meanwhile, Germany's economy is facing a contraction and a prolonged recession, which is a stark contrast to its past economic outperformance.
Germany's economy is in a recession, with zero growth since the third quarter of 2022 and a cumulative drop of 0.5% in GDP, which is likely to continue for another half year, impacting other European economies; the country's poor performance can be attributed to its energy policy and investors are also affected.
Central banks are likely to push western economies into a recession in order to tackle inflation, according to a member of Jeremy Hunt's advisory council. Karen Ward, an economist at JP Morgan Asset Management, believes signs of weakness will be needed before policymakers can ease their tough approach, as the message from a recent gathering of central bankers in Wyoming was that borrowing costs would need to be higher for longer than expected. Ward's comments come as Germany reports its highest wage growth figure since 2008.
The Federal Reserve meeting in September may hold the key to the end of the tightening cycle, as markets anticipate a rate hike in November, aligning with the Fed's thinking on its peak rate. However, disagreement among Fed policymakers regarding the strength of the economy and inflation raises questions about the clarity and certainty of the Fed's guidance. Market skeptics remain uncertain about the possibility of a "soft landing," with sustained economic expansion following a period of tightening.
Morgan Stanley's top economist, Seth Carpenter, believes that the US is nearing a dream economic scenario with falling inflation and steady growth, suggesting that the Federal Reserve is close to achieving a soft landing.
The U.S. economy may achieve a soft landing, as strong labor market, cooling inflation, and consumer savings support economic health and mitigate the risk of a recession, despite the rise in interest rates.
Fidelity International's Salman Ahmed maintains his prediction of a recession next year, citing the full impact of the Federal Reserve's monetary policy tightening and a wave of corporate debt refinancing as leading factors.
Top economist David Rosenberg predicts that the US will experience a recession within the next six months due to the aggressive interest rate hikes by the Federal Reserve and the erosion of credit quality in credit card debt.
Goldman Sachs has lowered its probability of a U.S recession in the next 12 months to 15% due to positive inflation and labor market data, while also predicting a reacceleration in real disposable income and expecting the Federal Reserve to keep interest rates unchanged.
Despite weak economic news and concern over a slowing economy, there is still optimism among investors that a recession is unlikely.
Bank of America warns that the US economy still faces the risk of a "hard landing" due to rising oil prices, a strong dollar, and potential interest rate hikes by the Federal Reserve, contrasting with the optimistic outlook of other Wall Street banks.
Economists predict that inflation will cool without a recession, as the effects of rate hikes have already taken shape, putting the US economy on track for a soft landing.
The odds of a recession in the US have collapsed, making markets vulnerable to any signs of the economy overheating and contributing to inflationary pressures.
The US economy is facing a looming recession, with weakness in certain sectors, but investors should not expect a significant number of interest-rate cuts next year, according to Liz Ann Sonders, the chief investment strategist at Charles Schwab. She points out that leading indicators have severely deteriorated, indicating trouble ahead, and predicts a full-blown recession as the most likely outcome. Despite this, the stock market has been defying rate increases and performing well.
Goldman Sachs CEO David Solomon believes the U.S. economy is unlikely to experience a significant recession, but warns that inflation will be more persistent than anticipated.
Treasury Secretary Janet Yellen and Goldman Sachs may be optimistic about a "soft landing" scenario for the US economy, but the author remains skeptical due to factors such as a deeply inverted yield curve, declining Leading Economic Indicators, challenges faced by the consumer, global growth concerns, and the lagging impact of the Fed's monetary policy, leading them to maintain a conservative portfolio allocation.
Despite economists' hopes for a "soft landing" of the economy, signs such as inflation and uncertain variables make it difficult to determine whether the U.S. economy has achieved this outcome.
Entrepreneur Jaspreet Singh warns that signs of a potential recession in America include labor shortages, inflation-driven spending, and high interest rates, with economists predicting that the country may start feeling the effects of a recession by the second quarter of 2024. Singh advises Americans to educate themselves about saving money and investing to prepare for the possible downturn.
Investors are more focused on the release of new forecasts from the Federal Reserve, which will reveal their views on the prospect of an economic "soft landing" and the rate environment that will accompany it.
Federal Reserve Chair Jerome Powell indicates that while policymakers project a "soft landing" for the US economy, he does not confirm it as a baseline expectation due to external factors beyond their control such as the autoworker strike, government shutdown, and higher borrowing costs.
The Federal Reserve has paused raising interest rates and projects that the US will not experience a recession until at least 2027, citing improvement in the economy and a "very smooth landing," though there are still potential risks such as surging oil prices, an auto worker strike, and the threat of a government shutdown.
The bond market's recession indicator, known as the inverted yield curve, is likely correct in signaling a coming recession and suggests that the Federal Reserve made a major mistake in its inflation policy, according to economist Campbell Harvey. The yield curve, which has correctly predicted every recession since 1968, typically lags behind the start of a recession, with the average wait time being 13 months. Harvey believes that a recession is imminent due to the Fed's tight monetary policy and warns against further interest rate hikes.
The Federal Reserve's measure of inflation is disconnected from market conditions, increasing the likelihood of a recession, according to Duke University finance professor Campbell Harvey. If the central bank continues to raise interest rates based on this flawed inflation gauge, the severity of the economic downturn could worsen.
The forecasted U.S. recession in 2024 is expected to be shorter and less severe than previous recessions, with the economy's interest-rate sensitivity much lower due to reduced leverage and elevated savings from the postpandemic environment, leading investors to consider positioning for investment opportunities that will drive markets into 2024.
The Federal Reserve left interest rates unchanged while revising its forecasts for economic growth, unemployment, and inflation, indicating a "higher for longer" stance on interest rates and potentially only one more rate hike this year. The Fed aims to achieve a soft landing for the economy and believes it can withstand higher rates, but external complications such as rising oil prices and an auto strike could influence future decisions.
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