6 Compelling Reasons indicating an Imminent Recession on the Horizon

As the summer brought positive economic indicators such as lower inflation rates, higher jobs rates, and increased consumer spending, Bloomberg Economics cautions that a recession is likely on the horizon.According to Bloomberg, factors such as the ongoing autoworkers strike, the return of student loan repayments, and the threat of a government shutdown after the expiration of Congress’s short-term spending bill in November, could lead to a decline in GDP growth in the fourth quarter.

Here are six reasons, as identified by Bloomberg Economics, that suggest a recession may be imminent:

Soft landing optimism ‘always’ comes before a recession

Historical data reveals that optimism about the economy often peaks before the onset of a downturn. For instance, Bloomberg cites former San Francisco Fed President Janet Yellen’s comments in 2007, where she predicted a soft landing just two months before the Great Recession began. Interestingly, Yellen, who is currently the secretary for the Treasury Department, expressed confidence in a soft economic landing without a recession last month. Bloomberg attributes economists’ failure to anticipate recessions to the non-linear nature of these events, which defies conventional predictions that trends will continue. As an example, Bloomberg highlights the Federal Reserve’s unemployment forecast, which predicts a jobless rate of 4.1 percent by the end of 2023 and 4.7 percent by the end of 2024, suggesting the avoidance of a recession. However, Bloomberg’s model, considering a potential break in the trend during an economic downturn, predicts significantly higher unemployment rates than those forecasted by the Federal Reserve.

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

Bloomberg emphasizes that the complete effects of the Federal Reserve’s interest rate hikes are yet to be experienced and will likely manifest by the end of 2023 or early 2024. These rate increases, reaching a 22-year high, were implemented to counter inflation. Federal Reserve Gov. Michelle Bowman recently suggested that additional interest rate hikes may be necessary due to rising energy prices in order to achieve the target inflation rate of 2 percent. The projected “turn down” in stocks and housing prompted by these actions could contribute to an economic downturn.

There are already indicators of an economic downturn

Using a model that examines the six indicators used by the National Bureau of Economic Research (NBER) to identify economic downturns, Bloomberg Economics finds that there is an above-average chance that NBER will announce the start of a U.S. recession in the last few months of 2023.

Threats to the economy are still emerging

• The United Auto Workers (UAW) strike: Experts predict that the ongoing UAW strike against the “Big Three” automakers (Ford, Stellantis, and General Motors) may cost the economy billions, although a precise estimation is not yet available.
• The return of student loan bills: Student loan payments resumed after a more-than-three-year pause, and Bloomberg estimates that this resumption could reduce annualized growth in the fourth quarter by around 0.2-0.3 percent.
• The surge of oil prices: Production cuts by Saudi Arabia and Russia have led to higher crude prices, influencing global markets and keeping gas prices near their summer highs.
• Government shutdown: While a deal on a short-term stopgap funding bill has been reached, the potential for a government shutdown exists if full-year spending bills cannot be agreed upon. Bloomberg Economics estimates that each week of shutdown decreases annualized GDP growth by approximately 0.2 percentage points. Although some recovery is possible once the government reopens, not all the lost growth can be regained.

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

Consumer spending could likely see a drop

Although events like Beyonce and Taylor Swift concerts and the movie releases of “Barbie” and “Oppenheimer” have contributed to third-quarter GDP growth, Bloomberg predicts that this surge in spending may be a “last hurrah.” The extra savings accumulated by Americans during the pandemic are expected to dwindle soon. Bloomberg notes an increase in credit card delinquency rates and certain segments of the auto loan market, suggesting a potential decrease in consumer spending.

The credit squeeze is only beginning

According to Bloomberg, the Fed’s survey of senior loan officers at banks reveals that around half of large and mid-sized banks are enforcing stricter criteria for commercial and industrial loans. This trend, second only to the pandemic period, indicates a credit squeeze similar to that experienced during the 2008 financial crisis. Bloomberg expects this impact to materialize during the fourth quarter of 2023, potentially leading to weakened investment and hiring.

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