The recent surge in inflation raises concerns over whether it could climb even higher, or if a recession is on the way.
Economists at Moody’s Analytics believe that the odds of a recession after accounting for factors such as consumption and supply and demand rises to 50 percent. And recession risks currently appear more noticeable than the risk of runaway inflation, they said.
According to Ryan Sweet, senior director at Moody’s Analytics, the U.S. labor market remains strong even as job growth is moderating. He expects that job growth, currently in the 400,000 to 450,000 range, needs to fall to 150,000 per month in order for the Federal Reserve to have a shot at engineering a soft landing. He doesn’t expect that kind of decline until 2023. And first-quarter inventories rose $188.5 billion, more than the $149.6 billion estimated.
“This bodes ill for second-quarter GDP,” Sweet said.
At a Retail Marketing Society webinar on Tuesday, Jason Trennert, chairman and CEO at institutional research and brokerage firm Strategas, said he doesn’t expect a recession in the next six to 12 months, mostly because the Fed didn’t start tinkering with rates until this past March and monetary policy operates on a lag between one event and the next. The currently high inflation rates make it even more difficult to avoid a recession.
“We think the recession odds are about 50 percent,” he said.
Trennert predicts a recession is likeliest in the first half of next year if it occurs at all. He’s worried about corporate profits through the end of the year, as well as companies shedding headcount to protect their margins.
Retailers begin reporting their second quarter results next month. Big-name companies like Walmart and Target earlier this year said they’d have to mark down their piled-up stock that accumulated as a result of changing consumer preferences and supply chain disruption. Some analysts speculate that second-quarter margins could get hammered, even as consumers with money to spend might score discounts on the items they were going to buy anyway.
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“There is a fair amount of accumulated savings [on] corporate and consumer balance sheets, but the savings rate has declined,” Trennert said. “There is already some evidence that that people are dipping into their savings to make to make ends meet.”
Jonathan Pingle, UBS’ chief U.S. economist, said on a webinar Wednesday that he expects that the U.S. economy could avoid recession through the end of 2023, though he says the probability has spiked to 40 percent.
If consumers continue to reduce spending, “we assume that job loss follows the declines in consumer spending as businesses pull back” when demand falls, Pingle said.
Many expect the Fed will announce an interest rate hike on Wednesday of at least 75 basis points, although some see 100 points as possible.
The Fed isn’t the only central bank eyeing rate hikes. On Thursday, the European Central Bank (ECB) announced a 50 basis point rate increase, bringing its negative interest rate to 0.00 percent. The ECB said further action would be forthcoming at upcoming meetings. And Wells Fargo economist Brendan McKenna on Wednesday said that emerging Asian central banks are shifting their positioning, with the Bank of Indonesia and Bank of Thailand expected to adjust rates to curb inflation.
“We’re in the midst of a historically fast slowdown,” Arend Kapteyn, UBS’ global chief economist, said at the same company webinar.
Whether the slowdown turns into a recession is still up for debate. UBS expects 3 percent global growth.
He believes inflationary pressures, which will continue for the next several months, should ease a bit to the point of disinflation in 2023—likely in the second half—as the inflation rates start to decline to the Central Bank targets. But Kapteyn noted that if inflation fails to come down, there are two risks that could lead to a recession. The first is the chance of a global consumer-led recession, and the second is the creation of a recession when Central Banks keep raising rates that eventually create a financial shock by exacerbating the deceleration that’s already underway.
For Kapteyn, the one uncertainty in Europe is the state of gas supply. A preemptive rationing in Europe would be disruptive, giving rise to “a couple of negative quarters,” while a gas shut-off would result in a “much more severe recession.” Except for the immediate gas shut-off, all other scenarios historically would result in a mild recession, Kapteyn said.