December 5, 2023

Brighton Journal

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Banks and economists say the US economy may be heading into a recession next year

Banks and economists say the US economy may be heading into a recession next year
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The US economy may be headed for a recession next year, according to mounting warnings from banks and economists, as a sudden bout of economic pessimism hits financial markets that have been relying on continued economic momentum.

Although large sectors of the economy – including the labor market and consumer spending – remain robust, there are growing concerns that rising borrowing costs for consumers and businesses, after years of near-zero interest rates, could cause a sudden deflation. The Federal Reserve has raised interest rates by 0.75 percentage points so far this year, while officials suggest that more sharp increases may be needed to cool the economy. The ongoing uncertainty of the coronavirus pandemic and Russia’s invasion of Ukraine are adding to the anxiety.

“Recession risks are high — uncomfortably high — and rising,” said Mark Zandi, chief economist at Moody’s Analytics. “For the economy to navigate without experiencing deflation, we need some very ingenious policymaking from the Fed and a bit of luck.”

Countries move to tackle inflation and increase risks to the global economy

This week alone, former Goldman Sachs CEO Lloyd Blankfein warned of “very, very high risks” of a recession. Charlie Scharf, CEO of Wells Fargo, said that “there is no doubt that the US economy is heading for recession.” Former Federal Reserve Chairman Ben Bernanke warned that the country could be Preparing for ‘stagflation’ A slowing economy accompanied by high inflation.

These concerns come amid a small batch of new data pointing to economic cooling, particularly in interest rate-sensitive sectors already feeling the brunt of the Fed’s promise to continue tightening monetary conditions. New home construction slowed in April. Mortgage demand continues to decline.

Some of the country’s largest and most influential retailers reported disappointing sales and profits this week due to rising costs and increased inventory. Inventory problems, designed to avoid supply chain disruptions, It causes the stock market to crash. Walmart stock fell more than 11 percent on Tuesday, its worst one-day loss in 35 years. On Wednesday, Target shares fell 26 percent, after a staggering 52 percent drop in quarterly profit, which executives attributed in part to lower demand for expensive items such as televisions, kitchenware and outdoor furniture.

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The Federal Reserve raised interest rates by half a percentage point in the fight against inflation

“While we expected a slowdown after stimulus in these categories…we did not expect the magnitude of this shift,” said Brian Cornell, Target CEO, said in an earnings call on Wednesday. “When we speak to our guests, they often express concerns about a range of rapidly changing circumstances, from geopolitics to the persistently high inflation they are experiencing.”

Goldman Sachs this week revised its second-quarter US economic growth forecast to 2.5%, citing rising prices and continuing supply chain disruptions. follow it An unexpected contraction in the first three months of 2022, when the economy shrank by 1.4 percent, mostly due to trade imbalances and lower inventory purchases.

The economy contracted 1.4% in the first three months of the year, raising fears of a recession

International turmoil, including the risk of a recession in Europe and China, lowers the outlook for the US economy. And a stronger US dollar — as higher interest rates make dollar investments more attractive — could dampen exports, raising the odds of a technical recession in which the economy shrinks for two consecutive quarters.

This fear of a deteriorating economy as well as shifts in consumers’ pandemic spending habits have led a number of high-tech darlings including Netflix and Peloton to announce layoffs in recent weeks. Twitter and Meta paused hiring plans, while Amazon executives recently said the company was “overstaffed” after months of rapid hiring.

Meanwhile, inflation, still near its highest levels in 40 years, has become a major challenge for both the economy and the Biden administration. Rising prices for essentials like food, energy and housing are straining Americans’ budgets and blurring their view of the economy. Gas prices soared to an all-time high this week, with prices averaging $4.57 a gallon nationwide. Watching closely Consumer Confidence Index From the University of Michigan shows that Americans’ opinions about their current financial conditions and future prospects have fallen sharply in the past year.

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Despite this bleak outlook, Americans continue to spend with passion. Apparel, auto and furniture sales rose in April, contributing to a 0.9 percent increase in overall retail sales from the previous month, according to Commerce Department data released this week.

There is a 35 percent risk of a recession in the next year, said Beth Ann Bovino, chief US economist at S&P Global. “People are spending, companies are still trying to hire. But there are certainly challenges ahead. The Fed’s actions will slow the economy, but the question is whether they can also topple the app bandwagon.”

Even if the US can avoid a recession in the short term, some economists say the explosive pace of inflation, with prices rising 8.3 percent in the past year, continuing supply and demand imbalances caused by the pandemic, and policy responses. In addition, it could turn into a more severe crisis in the future.

said Jason Furman, professor of economics at Harvard University, who served as an advisor during the Obama administration. “But it all makes me worried about a year, two or three years from now – because it could mean the Fed needs to raise rates more, and it could mean that you create an even bigger recession later.”

Zandi, Moody’s, said the skyrocketing price of gas and supply chain commodities linked to the pandemic and the Ukraine war had raised the specter of an economic downturn. He now estimates the odds of a recession in the US over the next 24 months at around 50%.

“We are traveling near the edge,” he said. The housing market is the next thing to roll around; The question is just how difficult it is.”

New home construction fell in April, due to a slowdown in single-family homes. According to the data, building permits have also declined, which provides a glimpse into future construction work It was released this week by the Bureau of Statistics and the Department of Housing and Urban Development.

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“Housebuilder sentiment slumped to a two-year low in May,” Yelena Maleyev, Grant Thornton economist, said in an analyst note. “Builders are seeing fewer foot traffic and expect sales to be softer as the busy home buying season enters.”

Mortgage rates are on the rise, but the hot housing market is slow to cool down

This softening is already spreading to the economy. Major mortgage lenders across the country, including Wells Fargo and, have laid off thousands in recent weeks as a result of dwindling demand for home loans and refinancing.

In Alexandria, Virginia, mortgage lender Kevin Richer said there is clear volatility among potential homebuyers. Refinancing began declining late last year, just as the Federal Reserve began signaling upcoming interest rate increases. In the months that followed, a combination of rising mortgage rates – now in 5.3 percent at a fixed interest rate He said 30-year mortgages, levels nearly doubled in early 2021 — and very high home prices were starting to deter buyers. He added that at least three clients had caught a “cold” and withdrew from approved contracts in the past two weeks.

“There is an intense feeling of nervousness there,” said Richer, president of First Meridian Mortgage. “It’s rare for people to win contracts and then fall back, but that’s what was happening.”

Other types of small businesses say they’re seeing a dip in consumer demand, too, as customers grapple with rising costs. Aaron Mulheren, who owns a glass repair business in Marion, Iowa, said that while homeowners continue to pursue necessities like fixing broken windows, they’re starting to think twice about spending on luxuries like custom bathrooms.

“Ordinary middle-class consumers are starting to hesitate,” Mulheren said. “Everything gets expensive, so they get an estimate, and then they put it off.”