Cracks in US Economy Start to Show as Recession Warnings Mount
The late Nobel Prize-winning economist Paul Samuelson once quipped that Wall Street had predicted nine out of the last five recessions. This time, the stock market may be right.
The US economy is starting to show signs of strain under the weight of decades-high inflation and climbing interest rates -- raising the risk of a downturn.
Investors are taking note, with equities nosediving this week as earnings gloom at retailers like Walmart Inc. and Target Corp. fueled the growing fears. And the trend could spell trouble for President Joe Biden, whose Democrats must defend thin Congressional majorities in November’s midterm vote.
Squeezed by higher prices for gasoline and food, American households are taking on record amounts of debt to help make ends meet. Socked by higher mortgage rates, homebuilders are turning gloomier about the outlook. Small firms are also struggling with rising business costs and difficulties in hiring or retaining workers.
“I don’t think you can have a completely benign soft landing of the economy at this point,” where inflation comes down but unemployment doesn’t go up, said Ethan Harris, head of global economics research at Bank of America Corp. “We’re either going to have a weak economy or a recession.”
Wall Street economists are cutting their growth forecasts in response to a tightening of financial conditions engineered by an inflation-fighting Federal Reserve. The last six months have seen a drop in equity prices, higher interest rates, and a stronger dollar.
Most economists are betting that the economy has enough momentum -- and pent-up demand for automobiles, housing and travel, thanks to savings built up in the pandemic -- to carry it through the end of this year without stumbling. It’s next year and beyond where they see the greater danger. And even then, the consensus is for a slowdown rather than a slump.