Impending Recession Looming

In a recent wake-up call, Wall Street’s renowned economist Ed Hyman has issued a stark reminder that economic stability can abruptly shift into a recession. Hyman’s cautionary words serve as a reminder that even during periods of apparent growth, underlying vulnerabilities can bring about a sudden economic downturn. As investors and analysts have been anticipating a recession for the past nine months, the next quarter may mark the arrival of this elusive downturn. This article delves into the factors contributing to this potential recession and explores the need for preparedness in the face of economic uncertainty.

The Warning Signs:
Hyman, known for his accurate economic forecasts, anticipates zero growth in the current quarter, followed by three subsequent quarters of contraction. He further predicts an increase in unemployment to 5.2 percent within a year, characterizing it as a “hard landing.” Several indicators contribute to this gloomy outlook, including a contracting money supply, credit tightening, a prolonged inverted yield curve, and declining leading indicators[^1^].

Sectoral Analysis:
Hyman’s firm, ISI Evercore, tracks various sectors to gauge overall economic activity. Their trucking survey, which historically correlates well with economic performance, has been in freefall[^2^]. Even typically robust industries like tech and airlines are showing signs of rolling over. These observations suggest that a slowdown has been brewing for some time.

Time as a Catalyst:
Despite the numerous warning signs, the economy has managed to continue growing thus far. The delayed impact of changes in monetary policy plays a significant role in this resilience[^3^]. The Federal Reserve began increasing interest rates in March 2022 and has implemented nine subsequent rate hikes. It is within the expected timeframe for these higher interest rates to impact economic growth, and signs of the impact are already emerging.

Consumer Spending and Manufacturing:
Consumer spending has been a crucial driver of economic growth, supported by accumulated savings during the pandemic and robust employment figures[^4^]. However, recent data indicates a decline in consumer spending, particularly in the goods sector, which has a ripple effect on manufacturing. Leading indicators, such as the Empire State Manufacturing Index and ISM for manufacturing, have been trending lower, and manufacturing employment has stagnated. Reports also suggest that increased credit card usage among young people may not be sustainable in the long term[^5^].

Sentiment and Small Businesses:
Consumer sentiment has been falling, as indicated by the University of Michigan’s May reading, and overall leading indicators have been on a downward trajectory for months[^6^]. Small-business owners, surveyed by the National Federation of Independent Businesses, have also exhibited increased pessimism, citing high inventories and declining sales. The prevailing uncertainty surrounding the debt ceiling debate further adds to the overall atmosphere of unease.

The Federal Reserve’s Role:
The Federal Reserve’s decision to raise rates amidst financial turmoil has raised concerns among experts[^7^]. While combating inflation is crucial, the single-minded focus on inflation control at the expense of broader economic stability may worsen the impending recession. Moreover, the ongoing debate over the debt ceiling introduces further uncertainty, deterring businesses from making new investments.

The Need for Preparedness:
Despite meeting the prerequisites for a recession, the anticipated downturn has yet to materialize. However, investors eagerly await its arrival, as it may bring about a return to a more favorable interest rate environment[^8^]. It is essential to exercise caution and acknowledge that the potential recession could have far-reaching consequences for the economy and financial markets. Prudent planning and risk management strategies are crucial for weathering the storm and minimizing the impact on individuals, businesses, and the overall economy.

Conclusion:
As the specter of a recession looms on the horizon, it’s evident that the economy may be on the cusp of a significant downturn. The signs are there: a contracting money supply, credit tightening, an inverted yield curve, and swooning leading indicators[^9^]. Despite the economy’s resilience thus far, time has caught up, and the impact of monetary policy changes is beginning to take hold. Housing starts have declined, consumer spending on goods is faltering, and leading indicators have been sliding for months. The sentiment among consumers and small-business owners is growing gloomier, adding to the mounting concerns. Amidst all this, the Federal Reserve’s continued focus on inflation could potentially exacerbate the severity of the forthcoming recession. While many investors long for a return to a more benign interest rate environment, the reality of a recession demands caution. As we brace ourselves for the reluctant recession, it’s crucial to prepare for the potential challenges ahead and navigate the uncertain economic landscape with prudence and foresight.

References:

Backhaus I, Hoven H, Di Tecco C, Iavicoli S, Conte A, Dragano N. Economic change and population health: lessons learnt from an umbrella review on the Great Recession. BMJ Open. 2022 Apr 4;12(4):e060710. doi: 10.1136/bmjopen-2021-060710. PMID: 35379647; PMCID: PMC8980730.

Philip LD, Sertoglu K, Akadiri SS, Olasehinde-Williams G. Foreign direct investment amidst global economic downturn: is there a time-varying implication for environmental sustainability targets? Environ Sci Pollut Res Int. 2021 May;28(17):21359-21368. doi: 10.1007/s11356-020-12053-8. Epub 2021 Jan 7. PMID: 33410078.

Harring, A. (2023, April 12). Top economist Ed Hyman says the Fed should pause since U.S. is probably already headed for a hard landing. CNBC. https://www.cnbc.com/2023/04/12/hyman-says-the-fed-should-pause-since-us-is-set-up-for-hard-landing.html