Worrying warning when the US economy is in recession

The US economy will be in recession in the next two years

Goldman Sachs predicts a 35% chance US economy recession within the next two years. Meanwhile, Bank of America warned that a recession shock is approaching.

Bloomberg cited a research report by Goldman Sachs chief economist Jan Hatzius as saying that the US Federal Reserve (Fed) will face the difficult task of tightening monetary policy enough to cool down inflation. growth without causing a recession in the US. Analysts say there is a 35% chance that the US economy will have a recession within the next two years.

According to the report, the regulator’s main challenge is to close the gap in the supply of abundant jobs but scarce labor supply. Fed Wage growth should also be slowed to a level consistent with the 2% inflation target by tightening financial conditions enough to reduce job openings without sharply increasing unemployment.

Achieving a so-called soft landing can be difficult, Hatzius said, because the historically large decline in US employment has only occurred during recessions. “These historical patterns show that the Fed faces a hard path to a soft landing,” Hatzius said.

However, the chief economist said that a recession is not inevitable as the normalization of labor supply and durable goods prices after COVID-19 will help the Federal Reserve. According to him, there are many examples of other countries in the Group of 10 advanced economies that have landed so smoothly.

According to Hatzius, 11 of the 14 tightening cycles in the US since World War II have been followed by a recession within two years. However, just eight of those can be attributed in part to Fed tightening – and soft or “soft” landings have been more common in recent times. He forecast, 15% chance of US recession in the next 12 months.

Meanwhile, Bank of America (Bank of America) warns that the recession shock is coming and inflationary High is an ominous threat to the economic recovery that began only two years ago.

Bank of America chief investment strategist Michael Hartnett warned ahead of a new government report showing consumer prices rose 8.5% in March, the fastest pace since December 1981. There have been waves price increase records from the same period last year in everything from new vehicles and clothing to baby food and salad dressings.

“Inflation is getting out of control,” Hartnett writes. Inflation causes recessions.”

The markets are preparing for the Fed quickly raised interest rates, at the fastest rate in decades, to control prices. The risk is that the central bank will do too much, sinking the economy in the process.

Price movements in a “recession” pattern in the market

Bank of America doesn’t outright point to a recession in the US, but warns of recession ghosts and recession signals on Wall Street.

The price action in financial markets has been very “recessive”, Hartnett noted, due to sharp declines in the typically economically sensitive builders, semiconductor manufacturers, small caps, retail and private equity.

Global growth expectations fell to a record low in April among hedge fund managers surveyed by Bank of America, according to a separate report released on Wednesday.

The survey also found that investor return expectations fell to their lowest level since March 2020, closing in at levels seen during other shocks including the 2008 crash. of Lehman Brothers and the 2001 dot-com bubble burst.

Last week, Deutsche Bank became the first major bank to forecast a recession. Bank forecasts the Fed will push the economy into a wave Depression “mild” to begin in late 2023.

Cooling down the job market

But others argue that the Fed can curb inflation without triggering a recession.

To keep inflation in check, Goldman Sachs said in a report Wednesday evening, economic growth must fall to a “modest below-trend pace – enough to convince companies to abandon some of its expansion plans them, but not so much to trigger sharp cuts in current output and employment.”

When the demand for labor drops significantly, the trend of recession will follow. Never has the unemployment rate risen more than 0.35 percentage points on a three-month average basis without being linked to a recession, Goldman Sachs said.

In spite of job market Overheating has “dramatically increased the risk of a recession,” according to Goldman Sachs, whose relative optimism based on strong balance sheets of businesses and homes leads the bank to believe that cooling the market will continue. The job market will be easier thanks to the post-COVID-19 normalization process.