The economy has been in turmoil so far in 2022, with inflation soaring to multi-decade highs and interest rates headed higher. As consumers look for signs that the worst is over, Wall Street economists offer some insight.
According to Goldman Sachs chief economist Jan Hatzius, the chances of a U.S. recession taking hold are higher for the long term versus the short term. Hatzius places the odds of economic contraction at 15% and 35% in the next 12 and 24-month periods, respectively. The Goldman Sachs economist weighed the good against the bad, pointing to “economic momentum” as a tailwind and tighter monetary policy as a headwind.
If history is any indication, Goldman Sachs’ warning should be heeded. Hatzius explained that since World War II, all but three of the Federal Reserve’s fourteen tightening cycles had paved the way for an economic recession within the following couple of years.
“Taken at face value, these historical patterns suggest the Fed faces a narrow path to a soft landing as it aims to close the jobs-workers gap and bring inflation back towards its 2% target,” he said.
In addition to Wall Street banks, others are weighing in. Mark Zandi, the chief economist at Moody’s, a financial service company and ratings agency, says there’s a 35% chance that the economy will enter a recession by 2024. He describes the possibility of a contracting economy as “uncomfortably high” in the coming 12-24 months.
However, while the chances of a recession are reasonably high, Zandi says the possibility of avoiding one is even greater. Despite the Fed’s unenviable position of having to tame inflation, he believes they will navigate the terrain successfully.
Zandi places the odds of a “self-sustaining economic expansion,” where the economy reaches full employment and inflation decreases at approximately 50%.
His more optimistic viewpoint is predicated on the assumption that the pandemic will continue to wind down, supply issues will iron out, and that “the impact of the Russian invasion — and its fallout on oil, natural gas, and other prices — is at its peak right now.”
However, most financial experts do not seem willing to make such a large assumption. Mortgage giant Fannie Mae weighed in with a less hopeful outlook, predicting that the economy’s chances of escaping the current cycle without a downturn are dwindling.
Fannie Mae forecasts that the economy will face a “minor recession” next year, citing the confluence of a hawkish Fed, the Ukraine war, and out-of-control inflation.
As the economy attempts to recover from the pandemic, it has been one step forward and two steps back.
The unemployment rate currently hovers at 3.6%, the lowest since the pandemic emerged.
Meanwhile, the inflation rate soared to 8.5% in March, its highest year-over-year increase since 1981, fueled by soaring gas prices in the wake of the Russia-Ukraine crisis and persistent supply chain issues.
If the economy enters into a recession, consumers would likely rein in their spending, which would strain profits for businesses and could lead to layoffs.
Higher inflation is already dampening consumer sentiment, with online sales trending lower. Wall Street is taking notice, with analyst firm Rosenblatt Securities attaching a “neutral” rating to e-commerce giant Amazon’s stock due to its exposure to rising prices.
U.S. equity funds suffered severe outflows during the week leading up to April 13. In the most significant bout of selling since year-end 2021, investors withdrew $12.57 billion from U.S. equity funds in the period, as per Refinitiv Lipper data.
Growth stock funds took the brunt of the selling, at $6.9 billion, compared to $2.95 billion for value stock funds.
On the flip side, discount retailers like Walmart and Costco have benefited from the current economic cycle, with their share prices rising 7% and 4%, respectively, in April so far.