Sep 19, 2023 - Economy

Why some economists still think a recession is coming

Illustration: Sarah Grillo/Axios

For most of the year, the narrative that the U.S. could pull off a soft landing — in which growth slows without tipping the economy into recession — has gained traction.

Why it matters: That optimism was a clear driver of the stock market's performance.

  • The S&P 500 is up 16% in 2023. The Nasdaq Composite index is up more than 30%.

Yes, but: Most Wall Street economists still expect a recession over the next year.

  • Forecasters surveyed by Bloomberg pegged the odds at around 60%.
  • Key point: That's down significantly from last year around this time, when virtually 100% of economists thought a recession was on the way.

Below, we take a look at what the soft landing skeptics are watching.

Slumping savings

The skeptics are looking for signs that the consumer spending juggernaut that has boosted the economy this year might be losing steam.

  • That's because personal consumption is about 70% of the U.S. economy.
  • The excess savings that Americans built up during the pandemic — estimated at over $2 trillion at the peak — could run out this quarter, according to a forecast by economists at the San Francisco Fed.
  • If the decline in savings eventually translates to lower spending, that could be bad for growth.
Data: U.S. Bureau of Economic Analysis, Federal Reserve Bank of St. Louis; Chart: Axios Visuals

"We see reasons to be vigilant about consumer spending. Labor markets are slowly cooling against a backdrop of nearly depleted excess savings," wrote analysts at Morgan Stanley Asset Management in a research note published Monday.

Oil prices are creeping up

The escalating costs of crude oil, now above $90 a barrel, could become another issue for the economy — and for efforts to squelch inflation for good.

Between the lines: The drop in energy prices over the last year was responsible for a big part of the decline in inflation.

  • The sharp decline — from 9% in June 2022 to under 4% in August — raised hopes that it might be possible for inflation to subside without the additional Fed rate hikes that could bring on a recession.
  • Without a tailwind from falling energy prices, inflation will likely fall at a slower pace — raising the possibility that rates stay higher for longer.
Data: FactSet; Chart: Axios Visuals

Zoom in: The creeping costs of gasoline, in particular — now approaching $4 a gallon on average — could become another issue that cools consumer spending. (In 2007, a sharp surge in gasoline prices may have been the straw that broke the camel's back for American consumers.)

Tougher bank lending

Banks have curtailed the flow of capital to businesses, in response to the Federal Reserve's rate hikes.

  • Business lending is considered a leading indicator for economic growth.

State of play: The latest quarterly survey of bank loan officers conducted by the Federal Reserve shows a broad-based increase in the degree of difficulty involved in getting a loan.

  • Aside from the early days of the COVID crisis, standards on business lending are the toughest they've been since the financial crisis back in 2008.
Net share of banks that said they tightened standards for commercial and industrial loans
Data: Federal Reserve, FactSet;  Note: Large/medium firms are those with annual sales of at least $50 million; Chart: Axios Visuals

"Recent tightening in loan standards is already consistent with historical recession episodes," wrote BNP Paribas economists in a recent note.

  • "Digging deeper, stringent [commercial and industrial] loan standards are consistent with near-zero [year-over-year] growth in real GDP over the near term."

The bottom line: If rates stay higher for longer, more borrowers will have to face these tougher lending standards — raising the likelihood that the bank pullback could crimp the economy.

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