A summer in which inflation trended lower, jobs remained plentiful, and consumers kept spending has bolstered confidence, not least at the Federal Reserve, that the world’s largest economy will avoid recession. However, these facts are not telling the full truth about the U.S. economy and there are numerous risk factors that might push the U.S. economy south and even into a recession.
There are ongoing political turmoil and dysfunction in Washington, a major auto strike and resumption of student loan payments. Add those issues to other forces at work on the economy such as dwindling pandemic savings to soaring interest rates, looming credit squeeze and higher oil prices. It takes a while for policy actions to have lasting sustainable economic impact. The Fed monetary policy with interest rate hikes, 525 basis points since early 2022, are finally starting to slow down inflation, even though at 3.7% it is still well above the 2% target rate. This could result in another hike before the year is over.
There are several other events impacting the U.S. economy negatively. The ongoing geopolitical conflicts in Ukraine and in the Middle East will keep costing U.S. billions of dollars and make global commodity prices more expensive. There is also a risk that the conflict in the Middle East could escalate and the U.S. could get increasingly involved in the conflict. The global economy will be impacted, in particular by higher oil prices. Oil prices have already climbed nearly $25 from the summer lows, pushing closer to $100 a barrel. A surge in crude prices is hitting every household and country. China is currently mired in a real-estate crisis and in the euro area, commodity prices have increased significantly, inflation is staying high, and lending is contracting at a faster pace than in the nadir of the sovereign debt crisis, a sign that already stagnant growth is set to move lower.
Domestically, the Union Auto Workers union is continuing and escalating their strike at America’s big three auto makers. The industry’s long supply chains mean stoppages can have an outsized impact. In the 54-day strike of 9,200 workers at GM in 1998 triggered a 150,000 drop in employment and the ongoing strike is significantly more severe. At this point, 34,000 UAW workers are on strike. Millions of Americans will start getting student loan bills again this month, after the 3 ½ year pandemic freeze expired. The resumption of payments will put additional pressure on the households. A market sell-off in September pushed the yield on 10-year treasuries to a 16-year high of 4.6% and still increasing. Higher borrowing costs have already slowed down the equity market and deterred companies from investing.
The political situation in Washington DC is also quite problematic. A 45-day deal to keep the government open has kicked one risk from October to November, but October has been overshadowed by the ousting of the republican leader and the voting of a new leader of the house of representatives. Hopefully this can be resolved quickly as all activity suddenly stopped, but it still shows the struggles with effective governing that is hampering the American economy. Nobody really talks about the budget deficit and the massive national debt of about $33.5 trillion and increasing.
Overall, there seems to be an increased number of clouds hanging over the U.S. economy. Credit card delinquency rates have surged, notably among younger Americans, and parts of the auto-loan market are turning negative as well. The credit squeeze is just getting started with tougher criteria for commercial and industrial loans, which likely will lead to weaker investment and hiring. The housing market is struggling due to high rates. There are a few positive signs in the economy such as higher productivity, growth of innovations such as artificial intelligence and new technologies, but overall, the next 4-6 months are looking challenging, and the U.S. economy could fall into a mild recession. Before inflation reaches the Fed target of 2%, it will be difficult to predict any major positive news related to the U.S. economy.