Recession Probability Soars as Inflation Worsens Economists have sharply raised the probability of a recession, now putting it at a level usually seen only on the brink of or during recessions.
Economists surveyed by The Wall Street Journal have dramatically raised the probability of recession, now putting it at 44% in the next 12 months, a level usually seen only on the brink of or during actual recessions.
The likelihood of a recession has increased rapidly this year as inflationary pressures remained strong and the Federal Reserve took increasingly aggressive action to tame them. Economists on average put the probability of the economy being in recession sometime in the next 12 months at 28% in the Journal’s last survey in April and at 18% in January.
Since the Journal began asking the question in mid-2005, a 44% recession probability is seldom seen outside of an actual recession. In December 2007, the month that the 2007-to-2009 recession began, economists assigned a 38% probability. In February 2020, when the last recession began, they assigned a 26% probability. (…)
The latest survey’s results showed a marked increase in economists’ forecast for inflation, which they see ending the year at 7%, up from 5.5% in the April survey. The poll of 53 economists was conducted June 16 to 17, after the Fed voted to sharply raise the benchmark federal-funds rate by 0.75 percentage point to a range between 1.5% and 1.75%.
Economists see the federal-funds rate at roughly 3.3% at the end of this year, up from 2% in the survey two months ago. That implies at least three more increases of 0.5 percentage point in 2022. (…)
On average, they forecast unemployment rising from 3.6% in May to an average of 3.7% at the end of 2022 and 4.2% at the end of 2023. (…)
On average, they see inflation-adjusted gross domestic product rising 1.3% in the fourth quarter of 2022 from a year earlier, down from 2.6% in the April survey. Last year the economy grew 5.5%, the
fastest since 1984, following a 2.3% drop in 2020 when the pandemic began. (…)
The key is the squeezed consumer and its spending on services:
Mike Wilson’s latest survey of ~2k US consumers, which was conducted 6/11 – 6/13, showed inflation concerns continue to rise across income cohorts – 67% (all-time high) vs. 64% just two weeks ago and 62% in April. 70% said they will likely curb spending over the next six months because of inflation (vs. 63% two weeks ago)… but despite groceries and gasoline being the expenses where consumers are noticing prices going up the most, both are at the bottom of the list for pullback on spending (see below). Only 53% are planning to travel over the next six months (vs. 58% two weeks ago and ~64% last summer), with the decline mostly driven by those earning $75 – $149k, while households with income ≥$150k were more committed to travel plans so far. (The Market Ear)
Morgan Stanley
Small Businesses Fall Behind on Hiring as Inflation Takes a Toll Companies with under 50 employees lost head count in three of the past four months, data show, reflecting the struggle to keep pace on wages and benefits.
Head counts at companies with fewer than 50 employees declined in three of the past four months, according to ADP payroll data, even as employment at larger firms continued to grow. (…)
Owners of many small companies say inflation has added to the pressures of an already tight job market, making it increasingly difficult to keep pace with the wages and benefits offered by large employers. The hiring challenges are stunting growth, small-business owners say, and further clouding their deteriorating economic outlook. (…)
BTW:
Source: TS Lombard
- J.P. Morgan’s job tracker is also weak lately:
Yellen Says High Inflation Locked In for Rest of This Year
Treasury Secretary Janet Yellen said that “unacceptably high” prices are likely to stick with consumers through 2022 and that she expects the US economy to slow down.
“We’ve had high inflation so far this year, and that locks in higher inflation for the rest of the year,” she said Sunday on ABC’s “This Week.”
“I expect the economy to slow,” she said, adding: “But I don’t think a recession at all inevitable.” (…)
- Gasoline Tax Holiday ‘Worth Considering,’ Yellen Says Treasury secretary says high fuel prices are a burden for U.S. consumers, but others say cutting the tax doesn’t necessarily offer consumer relief.
- Canadian National Workers Strike After Failed Negotiations
Iron Ore Sinks and Steel Mills Go Dark on Deepening China Gloom
The steel-making ingredient has now lost around a fifth of its value in a run of declines that’s extended to an eighth day. Chinese prices of metallurgical coal, used to make steel, were down as much as 12% at the lowest since late February.
Consumption of iron ore has been hit by China’s slumping property market and the country’s inability to put the coronavirus behind it. While there was some optimism last month that an easing of the current outbreaks would spur a swift rebound in economic activity, that appears to have been replaced by the realities of regular mass testing and the constant threat of more lockdowns. (…)
Downstream demand remains poor with few spot trades occurring, and the bleak outlook for China’s construction industry continues to test market confidence, Mysteel said in a separate note. A raft of supportive policy measures from Beijing in the last couple of months have failed to result in persistent price gains, with risks due to the virus and the Covid Zero policy continuing to hang over the market. (…)
Stocks Historically Don’t Bottom Out Until Fed Eases If history is any guide, the stock-market selloff might still be in its early stages.
(…) Going back to 1950, the S&P 500 has sold off at least 15% on 17 occasions, according to research from Vickie Chang, a global markets strategist at Goldman Sachs Group Inc. On 11 of those 17 occasions, the stock market managed to bottom out only around the time the Fed shifted toward loosening monetary policy again. (…)
The Fed’s moves “raise the risk of a recession starting this year or early next year and raises the risk frankly that they’re not going to be able to keep raising rates that long,” David Kelly, chief global strategist at J.P. Morgan Asset Management, said on a conference call with reporters Wednesday.
“I wouldn’t be surprised if within a year, we’re having a meeting where the Fed is considering cutting rates,” he added. (…)
The S&P 500 has fallen a median of 24% during recessions going back to 1946, according to research from Deutsche Bank. (…)
EARNINGS WATCH
Trailing EPS are now $215.16 likely rising to $218 after Q2. Full year: $229.35e. Twelve month-forward: $235.61e.
Revisions are turning negative…
…but not enough to move the aggregate numbers: Q3’22 earnings are seen rising 11.1% vs 10.6% on April 1 and Q4 are seen up 10.9% vs 10.4%.