Is a recession coming? Signs that the economy is starting to collapse

Wall Street is becoming increasingly convinced that Federal Reserve will drag the economy to Recession its fight against inflation.

Bank of America, Deutsche Bank, Wells Fargo and Goldman Sachs are among the most prominent predicting the possibility of deflation within the next two years, as the US central bank moves to tighten monetary policy aggressively in order to calm consumer demand and bring in inflation. It falls back to its 2% target.

There are growing signs that the banks may be right, although a recession is hard to predict.

Here’s a closer look at some of the signs that the economy is starting to split.

GDP unexpectedly shrank in the first quarter

Economic growth in the US is already slowing.

The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still deep in the throes of the coronavirus-induced recession.

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Gross domestic product shrank 1.4% on an annual basis in the three-month period from January to March, according to the government’s first reading of the data. This was well below the 1.1% growth forecast by Refinitiv economists, and they noted that dark clouds were looming.

“The sudden drop in GDP is a wake-up call that the economy is not as strong as we all thought,” said Chris Zaccarelli, chief investment officer at CIA. “It is likely that the GDP will be revised higher next month, because this is just the first release and there will be two revisions, but it is a warning sign.”

Traders work on the floor of the New York Stock Exchange (NYSE) on May 18, 2022 in New York City. (Spencer Platt/Getty Images/Getty Images)

Recessions are technically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, low income, and slow retail sales.

market downturn

Markets were wiped out in a broad sell-off this month as high inflation, rising interest rates and the threat of recession sparked anxiety among investors.

The benchmark S&P 500 is officially down more than 20% this year Entering a bear market Friday afternoon for the first time since March 2020, with the onset of the COVID-19 pandemic. Meanwhile, the Nasdaq Composite has entered the depths of its bear market, while the Dow Jones Industrial Average has also fallen for nine consecutive weeks.

Fed tightening

The Federal Reserve It hopes for the rarest of economic gains as it transitions into full-fledged inflation: cool consumer demand enough that prices stop rising, without crushing it so much that the country falls into recession.

Although Fed policymakers are counting on finding that elusive sweet spot – known as a soft landing – history shows that the US central bank often struggles with the successful thread between tightening policy and maintaining economic growth.

Recent research from Alan Blinder, former Federal Reserve Vice Chairman and Princeton economist, specified 11 tightening cycles since 1965, followed by eight. However, this does not mean that a severe recession is guaranteed: there have been five cases of either a very mild recession in which GDP fell by less than 1% or there was no economic downturn at all.

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Fed policymakers raised the benchmark federal funds rate by half a point earlier this month, and Chairman Jerome Powell promised two increases of the same size are on the table at the upcoming June and July meetings. He reiterated those sentiments as the Fed races to catch up with runaway inflation and bring it back to its 2% target, promising that the Fed will raise interest rates as high as needed to cool rates.

In this file photo on January 29, 2020, Federal Reserve Chairman Jerome Powell pauses during a press conference in Washington. (AP Photo/Manuel Balce Ceneta, File/AP Newsroom)

“What we need to see is inflation coming down in a clear and convincing way and we’ll keep pushing until we see that,” he said Tuesday during a Wall Street Journal live event. “If it involves exceeding widely understood levels of neutrality, we will not hesitate at all to do so.”

Higher interest rates tend to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending.

said RSM chief economist Joe Brusolas, who questioned whether the central bank would be able to achieve a soft landing.

economic inflation

The closely watched April CPI was supposed to show that high inflation has peaked and prices are starting to moderate.

Instead, prices actually rose more than expected in April, indicating that inflation will continue at elevated levels for some time: while the Labor Department reported that the headline inflation number was actually moderate for the first time in a month, the measure still rose by an amount 8.3. %, a remarkably fast pace approaching a 40-year high.

Fruit is displayed inside a store on May 12, 2022 in New York City. (Spencer Platt/Getty Images/Getty Images)

Meanwhile, a different measure that measures prices excluding food and energy – more volatile measures – jumped 0.6%, beating all estimates.

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“This is another bullish inflation surprise and suggests the slowdown will be very slow,” said Seema Shah, chief strategist at Principle Global Investors. “Focus will soon begin to shift from where inflation has peaked to a plateau, and we fear it will reach an uncomfortably high level for the Federal Reserve.”