Jun 30, 2022 - Economy

Fear of a recession could become a self-fulfilling prophecy

Illustration of a stressed out businessman on a laptop sitting on a downward trending arros

Illustration: Sarah Grillo/Axios

Fear of a recession could be the final straw that actually tips the economy into that recession, some analysts say.

Driving the news: Persistent inflation, and the Federal Reserve’s campaign to rein it in, are conspiring to tip the economy into a downturn — one that even Fed Chair Jerome Powell acknowledges could metastasize into a recession.

  • Wall Street, Main Street and Washington all have differing opinions about the likelihood of a recession and how deep it's likely to be if it happens.
  • Wall Street economists have been gradually hiking their recession forecasts. Their estimates now put the likelihood of a recession somewhere between 30% and 50% — or, as veteran market analyst Peter Boockvar opined last week – a staggering 99%.

Between the lines: All the chatter about a slowdown is creating what could best be summed up in the lyrics of a 1987 hit by soul singer Keith Sweat: Something just isn’t right, and consumers have a gut feeling it's not, even if jobs and spending remain robust.

  • Whether the odds of a recession are 30,40% or (*shudder*) 99%, fear can make itself into reality, if it impacts the public’s willingness to open their wallets in an economy overwhelmingly powered by consumer spending.

What they’re saying: In an Instagram post, Ritholtz Wealth CEO “Downtown” Josh Brown recently argued that we may “talk ourselves into a recession,” given the sharp downturn in consumer psychology.

  • “If enough people believe it’s time to rein in their spending - and then act on that belief - it becomes a self-fulfilling prophecy,” he wrote.
  • Even if growth slows without becoming a recession “people instinctively know that something’s just not right,” Brown said – channeling his inner Keith Sweat.

Where it stands: Although consumer demand remains strong, cracks are starting to show up in the labor market: some tech companies are laying off employees and jobless claims are inching up from 50-year lows.

  • As Axios’ Courtenay Brown wrote recently, bond and commodity prices “are…tilting the narrative toward a more conventional recession in which inflation and growth fall in tandem.”

How it works: A recession is technically defined as 2 consecutive quarters of negative activity. For those who may have forgotten, we’ve already had one in Q1.

Yes, but: Not everyone thinks a recession is a foregone conclusion.

  • Capital Economics warned in a research note that economy jitters are “overdone,” because negative sentiment has yet to slow down consumption, among other factors.
Go deeper