Recent history shows that anticipating a smooth landing often precedes unexpected challenges. This discomforting reality currently confronts the United States despite a period of low inflation, strong employment, and consumer spending.
A summer marked by decreasing inflation, robust employment opportunities, and sustained consumer spending has instilled confidence. Anticipation rises that the Federal Reserve would prevent a US economy recession.
While a last-minute agreement prevented an immediate government shutdown, there is still uncertainty about the US economy recession. It includes the threat of a significant auto strike, the resumption of student loan repayments, and the possibility of another shutdown when the stop-gap spending deal expires.
These factors could significantly dampen fourth-quarter GDP growth by a percentage point.
When combined with other potent economic forces, such as the depletion of pandemic savings, escalating interest rates, and the recent surge in oil prices, these shocks could collectively result in the US economy recession.
Meanwhile, according to Bloomberg, there are six compelling reasons why the US economy recession is the baseline expectation.
These factors encompass various aspects, including cognitive patterns in the human brain, intricacies of monetary policy, labor strikes, elevated oil prices, the potential for a credit crunch, and even unexpected events like the conclusion of Taylor Swift’s concert tour.
Reasons why the US economy recession remains a concern
1. Auto Strike
A significant auto strike is underway in the US. United Auto Workers union initiated a walkout at all three major American auto companies simultaneously, marking a first-time occurrence. The strike has now grown to involve approximately 25,000 workers.
Due to the extensive supply chains in the industry, such stoppages can have disproportionately significant consequences. For instance, in 1998, a 54-day strike involving 9,200 General Motors workers resulted in a substantial 150,000 job loss.
2. Student loan repayment
Former President Donald Trump initially implemented the forbearance policy, suspending payments and interest in response to the COVID-19 pandemic.
Borrowers are anticipated to commence their obligatory loan payments this month, marking the first time in over three years.
The expiration of a three-and-a-half-year pandemic freeze means that millions of Americans will resume receiving student loan bills this month. This development can potentially reduce annualized growth in the fourth quarter by an estimated 0.2 to 0.3 percent.
Although President Biden and his administration stand firm with students by introducing loan forgiveness options, scrutiny is still present among millions of borrowers.
3. Spikes in crude oil prices
A significant surge in crude oil prices, which affects every household’s expenses, is among the few highly dependable signs that an economic downturn is on the horizon. Oil prices have risen by nearly $25 since their summer lows, surpassing the $95 per barrel mark.
4. Yield curve
In September, a significant selloff drove the yield on 10-year Treasuries to a 16-year peak of 4.6 percent. Elevated and persistent borrowing costs have not only led to declines in equity markets but also raised concerns about the housing market’s recovery and the potential reluctance of companies to make investments.
5. Global Slump
There’s a possibility that global economic challenges could have a spillover effect on the US. China, the world’s second-largest economy, is grappling with a real-estate crisis. In the Eurozone, lending is shrinking more rapidly than during the worst sovereign debt crisis. These signs suggest that already sluggish growth in these regions may decline further.
6. Anticipated Government Shutdown
The 45-day government funding deal has shifted one potential risk from October to November, which could have a more pronounced impact on fourth-quarter GDP figures.
Bloomberg Economics approximates that each week of a shutdown reduces annualized GDP growth by approximately 0.2 percentage points, with most, though not all, of that regained once the government resumes normal operations.
Challenges and caution amid pandemic’s economic impact
Furthermore, the additional savings Americans accumulated during the pandemic, primarily due to stimulus checks and lockdowns, are depleting. The exhaustion of pandemic savings, particularly from stimulus checks and lockdowns, has left with potential the US economy recession.
While there’s a debate about the pace, the San Francisco Fed estimated that these savings had been exhausted by the end of September.
Calculations indicate that the poorest 80 percent of the population currently have less cash on hand than before the onset of the COVID-19 pandemic.
In recent years, economists have learned a humbling lesson. The massive disruptions caused by the pandemic and the Ukraine war have made forecasting models work utterly inaccurate. However, they performed well during stable periods. It also has heightened uncertainty regarding the likelihood of a US economic recession.
Amid these factors, exercising caution is well-advised. While a soft landing remains possible, is it the most probable outcome? Given the many challenges the US faces, including Federal Reserve rate hikes, auto strikes, student loan resumptions, elevated oil prices, and global economic slowdown, it appears less likely.