A summer of low inflation, strong job numbers, and continued consumer spending has given the US economy a boost of confidence that a recession can be avoided. However, there are several factors that could easily tip the economy into a downturn. A potential auto strike, the resumption of student loan repayments, and a potential government shutdown could all negatively impact GDP growth in the fourth quarter. In addition, other factors such as dwindling pandemic savings, soaring interest rates, and rising oil prices could contribute to a potential recession. Despite the optimism in the economy, history has shown that complacency often precedes a downturn.
One reason why economists struggle to forecast recessions is due to the linear nature of forecasting, assuming that future events will be extensions of what has already occurred. However, recessions are non-linear events, making them difficult to predict. An example of this can be seen in unemployment rates. The Federal Reserve’s current forecast shows a slight increase in the jobless rate, which would suggest the US is avoiding a recession. However, if there is a sudden break in the trend, such as an unexpected economic dive, it could result in higher unemployment rates and increase the risk of a downturn.
Additionally, the impact of the Federal Reserve’s interest rate hikes may not be felt until the end of the year or early 2024. This could have far-reaching effects on stocks and housing, potentially leading to a downturn. Furthermore, indicators that are important in determining if the US is in a recession, such as income levels, employment rates, consumer spending, and factory output, are already showing warning signs. Consensus forecasts suggest that a recession may have already begun in late 2023. Finally, there are potential shocks to the economy that could further disrupt growth, including an auto strike, the resumption of student loan repayments, an increase in oil prices, a downturn in the global economy, and the possibility of a government shutdown.
Despite the optimism around the economy and the strength of household spending, there are signs that a recession may be looming. The excess savings accumulated during the pandemic are running out, and the poorest 80% of the population have less cash on hand than before COVID-19. Additionally, credit card delinquency rates have surged, particularly among younger individuals. While the US economy has shown resilience in the past, it is important to recognize the potential risks and not become complacent in the face of a potential downturn.
