Stubborn inflation and huge interest rate hikes by the Federal Reserve will push the U.S. economy into a mild 1990s-style recession starting in the spring, Fitch Ratings warned on Tuesday.
In a report obtained first by CNN, Fitch slashed its U.S. growth forecast for this year and next due to one of the Fed’s most aggressive inflation-fighting campaigns ever. story. US GDP is now expected to grow just 0.5% next year, down from 1.5% in the firm’s June forecast.
High inflation “will prove too burdensome” for household incomes next year, Fitch said, cutting consumer spending to the point of causing a slowdown in the second quarter of 2023.
Fitch, one of the three largest credit rating agencies in the world, rates the ability of companies and nations around the world to repay their debt, providing key advice to investors.
The bleak forecasts add to growing fear among markets, economists and business leaders that the world’s largest economy is on the brink of a recession – just 2.5 years after the last one.
The silver lining, however, is that the next recession might not be as destructive as the last two major ones.
“The U.S. recession we expect is quite mild,” Fitch Ratings economists said.
The rating firm argued that the United States enters this difficult period from a position of strength, in particular because consumers are not in debt as much as in the past.
“U.S. household finances are much stronger today than in 2008, the banking system is healthier, and there is little evidence of an overbuilt housing market,” Fitch Ratings economists wrote.
The Great Recession, which began in late 2007, was the worst recession since the Great Depression and nearly led to the collapse of the financial system. The Covid recession, which began in early 2020, caused the unemployment rate to skyrocket to almost 15%.
In contrast, Fitch Ratings sees the unemployment rate rising from just 3.5% today to a peak of 5.4% in 2024. This implies an increase of 1.9 percentage points from current levels and translates by the loss of millions of jobs, but not as many as those lost during the two previous recessions: The unemployment rate increased by 11.2 percentage points during the Covid recession and by 5.6 percentage points during the Great Recession. Following the 1990-91 recession, the rate increased by 2.8 percentage points.
“Fitch Ratings expects a very strong consumer balance sheet and the strongest labor market in decades to cushion the impact of a likely recession,” the report said.
Despite growing fears of recession, the labor market remains very tight, with the supply of workers not in balance with the demand for labour. Layoffs are low, resignations and vacancies are high.
Fitch says the next recession will likely be “broadly similar” to the one that began in July 1990 and ended in March 1991.
There are intriguing similarities between now and the early 1990s.
Just like today, the 1990 recession happened after the Fed rushed to fight inflation by rapidly raising interest rates.
Similarly, this slowdown was preceded by a war-fueled oil shock. At the time, it was Iraq’s invasion of Kuwait that drove up gasoline and energy prices for Americans.
The current period of high energy prices is largely linked to Russia’s invasion of Ukraine, a conflict that has also driven up food prices.
The 1990-1991 recession helped undermine the political fortunes of then-President George HW Bush.
During the 1992 White House race, Arkansas Governor Bill Clinton blamed Bush policies for the recession and a Clinton strategist coined the phrase “It’s the economy, stupid” , highlighting the importance of this issue for voters.
Recent polls indicate that voters today are also intensely focused on the state of the economy. In a New York Times poll released Monday, 44% of likely voters said economic concerns are the most important issue facing America — far more than any other issue.
Inflation remains the biggest cloud hanging over the US economy. The high cost of living erodes the value of workers’ paychecks and undermines consumer confidence. Persistent inflation also caused the Federal Reserve to tighten the brakes on the economy by dramatically raising interest rates.
That’s why economists, in a separate Wall Street Journal survey, put the likelihood of a recession in the next 12 months at 63%, the highest level in more than two years.
JPMorgan Chase CEO Jamie Dimon told CNBC last week that a “very, very serious” mix of challenges is likely to cause a recession by the middle of next year.
Fitch Ratings said there is still a risk of a deeper recession than the one that began in 1990, in part because corporate America is more leveraged relative to the size of the economy than 30 years ago. year. The report also cited the “highly uncertain” impact of the Fed’s efforts to reduce its balance sheet by $9 trillion.
The biggest bright spot in the economy is the job market, where the unemployment rate is at its lowest level since 1969. However, Fed officials expect the jobless rate to rise over the next few months. coming quarters and Bank of America warns that the US economy will shed 175,000 jobs per month in the first quarter of next year.
Even White House officials admit a downturn could be in the cards.
President Joe Biden told CNN’s Jake Tapper last week that a “mild recession” is possible, although he does not anticipate it.
Transportation Secretary Pete Buttigieg told ABC News over the weekend that a recession was “possible but not inevitable.”
Although the risks have clearly increased, a recession is not a foregone conclusion.
No one, not even the Fed, knows exactly how this will all play out. It’s impossible to say what happens to a $23 trillion economy two years after a once-a-century pandemic and in the midst of a war in Europe. There is no manual for this.
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