6 reasons a recession is in the cards soon

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While the summer brought lower inflation rates, higher jobs rates and boosts of consumer spending, Bloomberg Economics is warning a recession is more likely than not happening soon.

Citing the ongoing autoworkers strike, the return of student loan repayments and the looming threat of a government shutdown after Congress’s short-term spending bill lapses in November, Bloomberg predicted at least a percentage point decrease in GDP growth in the fourth quarter. 

Here are six reasons a recession is likely to hit the U.S. soon, according to Bloomberg Economics.

Soft landing calls ‘always’ precede recessions

Referencing data that showed optimism about the economy often peaks before a downturn hits, Bloomberg pointed to then-San Francisco Fed President Janet Yellen comments in 2007, where she predicted a soft landing two months before the beginning of the Great Recession. 

Last month, Yellen, now the secretary for the Treasury Department  said she is “feeling very good” about the U.S. making a soft economic landing without a recession. 

As for why economists often do not anticipate recessions, Bloomberg pointed to the non-linear nature of recessions that contradict peoples’ usual predictions that similar trends naturally will continue.

Bloomberg used the example of the Federal Reserve’s latest unemployment forecast, which predicted the jobless rate to reach 4.1 percent by the end of 2023 and 4.7 percent by the end of 2024, which would indicate avoiding a recession.

Looking at a hypothetical break in the trend in the case of an economic downfall, Bloomberg’s model predicted much higher unemployment rates than currently forecast by the Federal Reserve. 

The full impact of Fed hikes haven’t been felt yet

Bloomberg stressed the full effects of the Fed’s hikes won’t likely come until the end of 2023 or early 2024, prompting a “turn down” in stocks and housing.

The Federal Reserve raised its rates multiple times over the past year and a half, reaching a 22-year high in an effort to combat inflation. 

On Monday, Federal Reserve Gov. Michelle Bowman said additional interest rate hikes will likely be needed in the wake of rising energy prices in order to get inflation back to its 2 percent target. 

There are already indicators of an economic downturn

Using a model to study the six indicators used by National Bureau of Economic Research (NBER) to analyze an economic downturn, Bloomberg Economics found there is a more than average chance that NBER will announce at some point next year that a U.S. recession began in the last few months of 2023.

Threats to the economy are still emerging

  • The United Auto Workers (UAW) strike: While it is still too early to quantify the full economic impact of the UAW’s ongoing strike against the “Big Three” automakers — Ford, Stellantis, and General Motors, experts predict it could cost the economy billions. In an August report, The Anderson Economic Group estimated a full-fledged 10-day strike against the Big Three could top $5 billion. 
  • The return of student loan bills: Student loan payments returned Sunday after a more-than-three-year pause. Bloomberg estimated the resumption of payments could shave around 0.2-0.3 percent from annualized growth in the fourth quarter. 
  • The surge of oil prices: Crude prices have continued to peak as production cuts from Saudi Arabia and Russia impact global markets and keep gas prices near summer highs. 
  • Government shutdown: Congress reached a deal over the weekend on a short-term stopgap funding bill that will fund the government through Nov. 17. A shutdown could still occur if they cannot agree on full-year spending bills, bringing the potential for impact on the fourth quarter GDP numbers. Bloomberg Economics estimated each week of shutdown shaves off around 0.2 percentage point off annualized GDP growth. A lot, but not all, is able to be recovered when the government reopens, Bloomberg noted. 

Bloomberg also cited the yield curve and a global slump as emerging threats to the economy.

Consumer spending could likely see a drop

While events like the Beyonce and Taylor Swift concerts, or the movie releases of “Barbie” and “Oppenheimer” boosted the third quarter GDP, Bloomberg predicted this surge in spending was a “last hurrah,” and that any extra savings Americans had from the pandemic will likely be running out soon. 

Maintaining delinquency rates may be low right now, Bloomberg said data shows a surge in credit-card delinquency rates as well as parts of the auto loan market are beginning to rise.

The credit squeeze is only beginning

Looking at the Fed’s survey of senior loan officers at banks, Bloomberg reported the latest reading shows around half of large and mid-sized banks are establishing tougher criteria for commercial and industrial loans. Besides the pandemic period, Bloomberg reported this is the highest since the 2008 financial crisis. 

Bloomberg said this impact will begin in the fourth quarter of 2023 and could lead to weakened investment and hiring. 

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