Poll: 52% chance of impending recession

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The US economy is at a critical juncture as high inflation persists and the Federal Reserve hikes interest rates at the most aggressive pace in decades – even the pundits are now ringing recession alarm bells.

Economists polled for Bankrate’s second-quarter economic indicator say there is a 52 percent chance the U.S. economy could contract over the next 12 to 18 months, according to the survey.

Only three of the 17 experts in the survey maintained their expectation of a nearly 1 in 3 chance of a downturn, while the majority (65 percent) put the economy’s chance of a recession at 50 percent or more. One economist said the US economy has a 100 percent chance of contracting.

The future is far from certain, and recessions are almost impossible to predict. However, the increasing likelihood of one occurring highlights the problems piling up against the financial system. Continued pressure on the supply chain from the ongoing coronavirus pandemic and conflict in Ukraine are among the issues that have pushed inflation to its highest level since the 1980s. But they also leave the Fed in a defenseless position, as the central bank has no way of cooling energy or food prices, which weigh the most on consumer wallets.

How many storm clouds are gathering over the economy is illustrated by 82 percent of economists who said risks are trending down over the next 12 to 18 months, up from 68 percent in the first-quarter survey. Only two economists said risks were tilted to the upside, while just one said risks were balanced.

Even if the Fed’s rapid rate hikes and decades of inflation topple the financial system, economists don’t expect it to be as severe as the downturn caused by the coronavirus pandemic or the Great Recession before it.

“An increasing or high risk of a recession does not necessarily mean the certainty of a severe recession,” said Mark Hamrick, senior economic analyst at Bankrate and head of the Washington office. “Compared to the experiences of the past decades, the emerging economic situation could be different once again. People need to stay as agile as possible with their personal finances, aware of and responsive to changing and possibly worsening conditions.”

Recession risks rise as high inflation persists

Consumer inflation accelerated again in May, rising at the fastest pace of the pandemic-era, rising 8.6 percent year-on-year faster-than-expected, according to the Bureau of Labor Statistics. Economists — and some Fed officials themselves — predicted inflation would peak in early 2022.

Inflation rose not only in the sectors hit by the pandemic, but also in services and rents. Even more poignantly for Fed officials, key indicators tracking consumer expectations for future inflation began to pick up. All of these factors could make stubbornly high inflation more sustainable.

The news put the Fed in a difficult position ahead of its June meeting. After signaling markets that they were preparing to hike interest rates by half a percentage point for the third consecutive meeting, officials backed off that commitment less than a week before the official announcement of their rate hike in June. Instead, they ended up raising interest rates by three-quarters of a point — the largest rate hike since 1994 — and spreading expectations of raising interest rates to a target range of 3.25 to 3.5 percent, the highest since 2008.

“The Fed has a very difficult task,” said Gus Faucher, chief economist at PNC Financial Services Group. “It’s possible to slow growth and inflation without a recession, but there’s little room for error. In addition, there is a possibility of further negative shocks to the growth and inflation outlook, which could lead to a recession.”

Economists in the Bankrate survey are broadly expecting the Fed to hold on, with the majority targeting a policy rate at the top end of the 3% to 4% range.

Inflation is a major problem for the US economy. Nearly 3 in 4 Americans (or 74 percent) said higher prices would hurt their finances, according to a March Bankrate poll. But the Fed risks doing too much too quickly. To make the job even harder, Fed officials have big blind spots, working with backward-looking data and entering an economy that was already expected to slow after last year’s big fiscal stimulus.

Inflation is also more than four times higher than the Fed’s 2 percent target, and supply issues are still adding to those pressures, raising the question of how high rates need to go before they start cooling prices.

“The Fed’s need to bring inflation back to its 2 percent target puts risks to the US economy directly on the downside,” said Scott Anderson, executive vice president and chief economist at Bank of the West. “The Fed has a 50/50 chance of landing this plane without triggering a recession, but it needs some help from the supply side of the economy. Global oil prices need to come down significantly and supply chains need to be unraveled.”

Hear from the experts

methodology

The Bankrate Economic Indicator Survey for Q2 2022 among economists was conducted June 20-27. Poll requests were emailed to economists nationwide, and responses were voluntarily submitted online. Respondents were: Ryan Sweet, Senior Director of Economic Research, Moody’s Analytics; Yelena Maleyev, Economist, Grant Thornton LLP; Odeta Kushi, Deputy Chief Economist, First American Financial Corporation; Lawrence Yun, Chief Economist, National Association of Realtors; Robert Hughes, Senior Research Faculty, American Institute for Economic Research; Joseph Mayans, Director of US Economics, Experian; Mike Fratantoni, Chief Economist, Mortgage Bankers Association; Bernard Baumohl, Chief Global Economist, The Economic Outlook Group; Scott Anderson, Executive Vice President and Chief Economist, Bank of the West; Bernard Markstein, President and Chief Economist, Markstein Advisors; Mike Englund, chief economist, action economics; John E. Silvia, Founder and President, Dynamic Economic Strategies; Bill Dunkelberg, Chief Economist, National Federation of Independent Business; Tenpao Lee, economics professor, Niagara University; Robert Frick, business economist, Navy Federal Credit Union; Gus Faucher, Chief Economist, PNC Financial Services Group; and Peter Morici, economist and professor of business administration, University of Maryland.

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