When everyone expects a soft landing, brace for impact. That’s the lesson of recent economic history — and it’s an uncomfortable one for the US right now.
A summer in which inflation trended lower, jobs remained plentiful and consumers kept spending has bolstered confidence — not least at the Federal Reserve — that the world’s biggest economy will avoid recession.
A last-minute deal to avoid a government shutdown kicks one immediate risk a little further into the future. But a major auto strike, the resumption of student-loan repayments, and a shutdown that may yet come back after the stop-gap spending deal lapses, could easily shave a percentage point off GDP growth in the fourth quarter.
Add those shocks to other powerful forces at work on the economy — from dwindling pandemic savings to soaring interest rates and now oil prices too — and the combined impact could be enough to tip the US into a downturn as early as this year.
Here are six reasons why a recession remains Bloomberg Economics’ base case. They range from the wiring of the human brain and the mechanics of monetary policy, to strikes, higher oil prices and a looming credit squeeze — not to mention the end of Taylor Swift’s concert tour.
The bottom line: history, and data, suggest the consensus has gotten a little too complacent — just as it did before every US downturn of the past four decades.
Auto Strike: The United Auto Workers union has called a walkout at America’s Big Three auto firms, the first time they’ve all been targeted at the same time. It expanded the strike on Friday to encompass some 25,000 workers. The industry’s long supply chains means stoppages can have an outsize impact. In 1998, a 54-day strike of 9,200 workers at General Motors triggered a 1,50,000 drop in employment.
Student Bills: Millions of Americans will start getting student-loan bills again this month, after the three-and-a-half-year pandemic freeze expired. The resumption of payments could shave off another 0.2 percent-0.3 percent from annualized growth in the fourth quarter.
Oil Spike: A surge in crude prices — hitting every household in the pocket book — is one of the handful of truly reliable indicators that a downturn is coming. Oil prices have climbed nearly $25 from their summer lows, pushing above $95 a barrel.
Yield Curve: A September selloff pushed the yield on 10-year Treasuries to a 16-year high of 4.6 percent. Higher-for-longer borrowing costs have already tipped equity markets into decline. They could also put the housing recovery at risk and deter companies from investing.
Global Slump: The rest of the world could drag the US down. The second-biggest economy, China, is mired in a real-estate crisis. In the euro area, lending is contracting at a faster pace than in the nadir of the sovereign debt crisis — a sign that already-stagnant growth is set to move lower.
Government Shutdown: A 45-day deal to keep the government open has kicked one risk from October into November - a point where it could end up doing more damage to the fourth quarter GDP numbers. Bloomberg Economics estimates that each week of shutdown takes about 0.2 percentage points off annualized GDP growth, with most but not all of that recouped once the government re-opens.What’s more, the extra savings that Americans amassed in the pandemic — thanks to stimulus checks and lockdowns — are running out. There’s a debate over how fast, but the San Francisco Fed calculated that they’d all gone by the end of September. Bloomberg calculations show that the poorest 80 percent of the population now have less cash on hand than they did before Covid.
For economists, the past few years have provided a lesson in humility. Confronted with seismic shocks from the pandemic and Ukraine war, forecasting models that worked fine in the good times have completely missed the mark.
All of this provides good reasons for caution. A soft landing remains possible. Is it the most likely outcome, though? With the US confronting the combined impact of Fed hikes, auto strikes, student loan repayments, higher oil prices, and global slowdown we think not.
