Bank of America, Deutsche Bank, Wells Fargo and Goldman Sachs are among the most prominent firms predicting a possible downturn over the next two years as the U.S. central bank moves aggressively to tighten monetary policy to cool consumer demand and bring inflation back to its 2% target .
There are growing signs that the banks may be right, even though recessions are notoriously difficult to predict.
Here’s a closer look at some of the signs that the economy is starting to split.
GDP shrinks unexpectedly in the first quarter
U.S. economic growth has slowed.
The U.S. Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly contracted in the first quarter of the year, the worst performance since the spring of 2020, when the economy was still in the throes of a COVID-induced recession.
According to the government’s first reading of the data, GDP contracted at an annualized rate of 1.4% in the three-month period from January to March. That was well below the 1.1% growth forecast by economists at Refinitiv, suggesting dark clouds are looming.
“The stunning drop in GDP is a wake-up call that the economy is not as strong as we thought,” said Chris Zaccarelli, chief investment officer at the Alliance of Independent Advisors. Since this is only the first release, there will be two corrections, but that’s a warning sign.”
Technically, a recession is defined as two consecutive quarters of negative economic growth, characterized by high unemployment, low or negative GDP growth, falling incomes and slowing retail sales.
Markets have been wiped out in a broad sell-off this month as high inflation, rising interest rates and the risk of a recession rattled investors.
The benchmark S&P 500 is officially down more than 20% this year Enter a bear market On Friday afternoon, it was the first time since March 2020, when the COVID-19 pandemic began. Meanwhile, the Nasdaq Composite has plunged into a bear market, while the Dow Jones Industrial Average has plunged for nine straight weeks.
this US Federal Reserve It wants to achieve the rarest economic feat as it enters full-blown inflation-fighting mode: cooling consumer demand enough so that prices stop rising without crushing it enough to tip the country into recession.
While Fed policymakers are counting on finding the elusive sweet spot — a so-called soft landing — history has shown that the Fed has often struggled successfully to weave between tightening policy and keeping the economy growing.
A recent study by former Federal Reserve vice chair and Princeton economist Alan Blinder, Sure Of the 11 contractionary cycles since 1965, eight have been followed by recessions. Still, that doesn’t mean there’s bound to be a severe recession: There have been five very mild recessions, in which GDP fell by less than 1%, or no recession at all.
Fed policymakers raised the benchmark federal funds rate by half a percentage point earlier this month, while Chairman Jerome Powell all but promised two similar-sized increases at upcoming meetings in June and July. interest. He echoed that sentiment as the Fed struggled to catch runaway inflation and cut it to its 2 percent target, promising that the Fed would raise interest rates as high as needed to cool prices.
“What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that,” he said at a Wall Street Journal live event on Tuesday. “If this involves a level of neutrality beyond widely understood, we will not hesitate to do so.”
Higher interest rates tend to lead to higher lending rates for consumers and businesses, which can slow economic growth by forcing employers to cut spending.
“The Fed is trying to thread the needle while wearing boxing gloves and braces, which reduces its latitude to act without compromising the real economy,” said Joe Brusuelas, chief economist at RSM. cause damage,” he had questioned whether the central bank would be able to achieve a soft landing.
The closely watched consumer price index for April was supposed to show that high inflation has peaked and prices are starting to slow.
Conversely, prices actually rose more than expected in April, suggesting inflation will remain elevated for some time: While the Labor Department reported that headline inflation data actually slowed for the first time in a month, the measure still surged by 8.3 %, significantly faster than the 40-year high.
Meanwhile, another measure that excludes food and energy prices — a more volatile measure — rose 0.6%, beating all expectations.
“This is another inflation upside surprise that suggests the deceleration will be very slow,” said Seema Shah, chief strategist at Principal Global Investors. “The focus will soon start to shift from where inflation is peaking to where it is stabilizing, and we are concerned that inflation will stabilize at A high that is unnerving for the Fed.”