As a result of persistently high inflation, and a Federal Reserve that is becoming more hawkish, the U.S. could see its economy spiral into recession within the next year.
Greg Daco, EY-Parthenon’s chief economist, stated in a news analyst report that there is a chance of an economic recession in the United States over the next year. He said that the chances of this happening are between 35% to 40%.
A global downturn is even more likely.
Daco stated that a U.S. recession was unlikely in the near future, but that there are many uncertainties. “I put the chances of a U.S. depression at 35-40% over the next twelve months. However, I believe the odds for a significant global slowdown to be close to 100% within the next six months.”
He wrote that while the U.S. economy is strong at the moment, cracks are beginning to show in its foundation. Inflation at an all-time high, rising interest rates, and depressed financial markets will likely impact consumer spending over the next few months. Consumption accounts for around two-thirds (or roughly a third) of the country’s gross domestic product. This is the largest measure of the nation’s goods and services.
Daco stated that “With the Fed tightening monetary policy with greater determination and the global economic outlook turning bleaker,” the U.S. will be more vulnerable to a downturn over the next months.
Already, the U.S. economy is experiencing a slowdown in growth. The Bureau of Labor Statistics announced earlier this month that the country’s gross domestic product fell unexpectedly in the first quarter of 2019. This is the worst performance since the spring of 2020 when the economy still suffered from the COVID-induced depression.
This analysis is being made amid mounting fears that the Fed will drag the economy into recession while it tries to control inflation. Inflation rose by 8.3% in April, close to a 40-year record. Fannie Mae, Deutsche Bank, and Bank of America are just a few of the Wall Street companies that predict a downturn over the next two years.
“The Fed is trying to thread the needle while wearing a boxing glove and a mouthguard, which reduces their degrees of freedom without causing damage to the real economy,” stated Joe Brusuelas (RSM Chief Economist), who has questioned if the central bank can achieve a soft landing.
In an effort to catch up to inflation, policymakers increased the benchmark interest rate by 50 basis points this month.
Jerome Powell, Fed Chairman, has admitted that there may be some pain associated with reducing inflation. However, he has refuted the idea of an impending recession. He identifies the strong labor market as a bright spot in the economy and has highlighted the positive aspects of consumer spending and the labor market. He warned, however, that a soft landing was not possible.
Powell stated Wednesday that it would be a difficult task and that global events have made it more difficult in recent months. He was referring to the Ukraine war, COVID lockdowns in China, and the Ukraine conflict.
He said that there are many possible paths to a soft landing. It’s not our job to handicap the odds. Our job is to try to do that.