New York, United States / TimesNewswire / January 20, 2023 – As the world’s largest economy, the economic development of the United States has a significant impact on the world economy. However, since 2022, the problem of sluggish economic growth in the United States has gradually become increasingly prominent, and recession expectations have become increasingly apparent. Judging from the recent inversion of US bond yields, shrinking corporate profits, and forward-looking indicators on high-tech companies, the US dollar, military, and international trade, the current risk of the US economy sliding into a full-blown recession continues to accumulate.
Keywords: the US economy, recession;
Affected by multiple adverse factors, such as the impact of the Covid-19 epidemic, geopolitical instability, and the rise of trade protectionism, global economic growth began to decline significantly in 2022. In this landscape, the US economy, which is the vane of the world economy, has also started to decrease in weak growth, and the risk of recession has increased sharply. Recently, further influenced by high inflation and the substantial interest rate hikes driven by the Federal Reserve, the US economic data has begun to weaken drastically, and the probability of recession implied by interest rate differentials has also risen sharply. Various factors indicate the growing possibility of a downturn in the US economy that will hit the world.
I.Typical Indications of the US Economic Downturn
1.Inflationary pressures remain high.In 2022, inflation in the United States did not fall but rose significantly since the outbreak of the Ukraine crisis further added to the pressure in the United States in the first half of the year. Its year-on-year increase in the consumer price index (CPI) continued to expand from 7.5% in January 2022, reaching a maximum of 9.1% in June, a new high since November 1981, of which energy prices rose by 41.6% year-on-year. The US core CPI rose again in July after a brief retreat to 6.6% in September, returning to a 40-year high as a tight labor market pushed up service prices. In September 2022, the Fed’s more focused core personal consumption expenditures (PCE) price index also went up 5.2% year-on-year, second only to a 40-year high of 5.4% recorded in March.
2.The unemployment rate has risen significantly. In October 2022, the US unemployment rate, although it returned to 3.7%, is still at a record low; The vacancy rate rebounded to 6.5% in September, still at an all-time high. The labor market, which is currently in the overheating phase in the United States, is also cooling. In the second half of 2022, the number of new non-farm payrolls in the United States showed a downward trend, with 261,000 new non-farm jobs added in October, down from 315,000 in September. In addition, the Manufacturing Business Outlook Survey released by the Federal Reserve Bank of Philadelphia showed a sharp drop to 7.1% in November, compared with 28.5% previously, indicating that the labor market is cooling rapidly. As the number of new jobs continues to decline and the unemployment rate rises sharply, the labor market may turn to a sub-cold phase, signifying that the US economy is in the midst of a sharp recession.
3.The trade deficit has narrowed significantly. In the first quarter of 2022, US imports of goods and services surged amid robust domestic demand and a spike in commodity prices due to the Ukraine crisis, briefly leading to a trade deficit of $106.7 billion in March, the highest on record. However, after the first quarter, the US trade deficit narrowed rapidly to $73.3 billion in September, the lowest since October 2021, driven by a significant decline in imports due to weaker domestic demand and rapid growth in US exports driven by increased energy exports to Europe. Among them, the trade deficit in non-oil products was US$102.7 billion, while the trade surplus in petroleum and petroleum products was US$2.44 billion.
4.The financial market has become more volatile. Since 2022, due to the high inflation pressure in the United States, the Federal Reserve has accelerated the withdrawal of stimulus monetary policy, raising the target range of the federal funds rate six times during the year. Especially after June, the Fed raised interest rates by 75 basis points four consecutive times, and the policy rate reached the range of 3.75%~4%, the highest level since 2008. Moreover, the Fed has reduced its balance sheet at a pace of $47.5 billion per month since June and raised the ceiling to $95 billion per month within three months.
5.Major US banks underperformed. Major U.S. banks announced their Q4 2022 results on January 13. Affected by the expectation that the US economy would fall into recession, banks generally increased their provisions for credit losses, significantly dragging down banks’ performance. For example, J.P. Morgan Chase Bank provided $2.288 billion for credit losses in the fourth quarter of 2022, higher than the $1.537 billion in the previous quarter. In addition, Bank of America provided $1,092 million for credit losses in the fourth quarter of 2022, higher than the $898 million in the previous quarter. In comparison, it released a provision for credit losses of just $489 million in the fourth quarter of 2021. Wells Fargo also provided $957 million for credit losses in the fourth quarter of 2022, higher than the $784 million in the previous quarter, which released $452 million in the fourth quarter of 2021.
6.The debt crisis is imminent. In recent years, the US government has been living on debt, which has snowballed. By January 19 this year, the US government debt will hit the ceiling of $31.4 trillion! Once this debt ceiling is touched, if the US Congress, mainly the House of Representatives, does not approve the increase, the US Treasury will not be able to issue new debt, and the US government may default. Economists at Goldman Sachs warned on January 16 that the debt limit collapse in 2023 could be the worst since 2011. Furthermore, the US House of Representatives is now in the hands of Republicans. The Republican Party has just witnessed Kevin McCarthy elected as the House Majority Leader, and a fierce political battle against Joe Biden was launched immediately. Moreover, the debt ceiling is a trump card in the hands of the Republican Party. With the current situation in which the Democratic Party controls the Senate, and the Republican Party controls the House of Representatives, the debate on raising the debt ceiling has become more intense due to partisan disagreements, and the debt crisis in the United States is on the verge of erupting.
II.Impact of the Recession on the United States
1.The US people’s everyday life is hurt badly.High-interest rates and soaring inflation have led to a sharp increase in household debt in the United States, disrupting the daily life of the US people. According to statistics, in the second quarter of 2022, US household debt increased to $310 billion; It skyrocketed to $351 billion in the third quarter, the most considerable increase since 2007. As household debt increases, so do arrears.
High-interest rates will push up the dollar and adversely affect trade. They will also raise the cost of mortgages, further eroding US households’ financial space and ability to buy homes. In November 2022, US retail sales fell 0.6% month-on-month, the most considerable decline in nearly a year, reflecting higher spending and lower incomes, which led to a sharp drop in the purchasing power of US consumers. Moreover, to some extent, consumers have lost the motivation to buy consumer goods. The driving force of economic growth in the United States rests in consumption. Its household credit is proliferating, while the savings rate has fallen sharply, resulting in a sharp decline in the ability of the US people to fend against risks. The current percentage of disposable income in savings among US people has fallen to 2.4 percent, well below the 2008 levels, with its total net savings continuing to decline.
2.US companies are competing to lay off their employees.High inflation in the United States and aggressive interest rate hikes set off by the Federal Reserve have led to a sharp rise in corporate financing and borrowing costs, narrowing corporate investment and profitability margins. In the post-epidemic era, the market has adjusted from a virtual one to a real one. Offline production and life have resumed, and the virtual economy has already started to contract. While consumer technology spending has decreased, the prospects for digital advertising have been bleak, prompting technology companies to carry out a structural transformation, resulting in enterprises having to cut expenses through layoffs, freezing recruitment, and other means.
The rapid development of the high-tech industry in the United States for nearly 20 years has also been hindered, with many companies performing unsatisfactorily and stock prices plummeting. As a result, companies begin to lay off employees on a large scale. As of mid-November 2022, more than 67,000 employees in the US tech industry have been laid off, according to the statistics. E-commerce giant Amazon announced on January 4 that it would lay off more than 18,000 workers. Business software leader Salesforce also announced a cost-cutting plan, including a 10 percent job cut involving about 8,000 employees. Online video platform Vimeo also announced its second round of layoffs in six months, involving an 11% layoff of employees. On January 5, fashion e-commerce company Stitch Fix said it would cut about 20% of its regular employees. On January 9, AI startup Scale AI stated that it would cut 20% of its workforce.
3.The US economy and financial markets have been disrupted. Aggressive interest rate hikes by central banks in advanced economies, such as the Federal Reserve, have put emerging markets and developing countries under tremendous pressure. Daniel Leigh, head of the World Economic Studies of the International Monetary Fund (IMF), said that the Fed’s aggressive interest rate hikes triggered a sharp dollar appreciation. Furthermore, it will lead to a vast increase in debt repayment pressure on countries that borrow in dollars, especially the debt burden of less developed countries. According to the International Monetary Fund, more than a quarter of emerging economies defaulted on their debts, or their bond prices plummeted. More than 60% of low-income countries face debt distress. High inflation and the Fed’s rate hikes are “eroding everything.” As the dollar strengthens, the price of energy products such as oil circulating on the international market will continue to rise, “which is likely to derail the US economy and trigger a mild or even severe recession.”
4.Debt crises could be triggered around the world. With the epidemic still not under control and the surge in energy prices caused by the conflict between Russia and Ukraine, this year’s global economy will face multiple slowdown risks. The Federal Reserve adopted a tightening monetary policy to save the US economy from continuing to decline, which has put the world economy under heavy pressure. It will inevitably have a currency spillover effect on emerging markets and developing countries. It will leave some developing countries in trouble and impact the economies of developed countries. Agence France-Presse pointed out that the Fed’s renewed fund interest rate hikes may further exacerbate the risk of capital outflows and currency depreciation in these regions.
The US dollar interest rate hikes have led to large capital outflows from emerging markets, a sharp depreciation of their currencies, and a push-up in their debts. As a result, the likelihood of a massive debt default in emerging economies has increased significantly this year. A higher dollar would make it difficult for developing countries to pay interest on dollar-denominated debt. Some countries that rely on cheap imports could also suffer.
The latest data from the US Department of Commerce showed that US GDP fell by 0.9% annually in the fourth quarter of 2022, which is another contraction after a 1.6% decline in the third quarter. Moreover, Bank of America’s latest forecasts suggests that the US economy may begin to recess in the first quarter of 2023, and growth will be harmful for the entire year. At the same time, US economic policy has significant risk spillover effects, posing severe risks to the world economy in 2023. On the one hand, the continued aggressive monetary and financial policies of the United States have led to the appreciation of the US dollar, increasing the risk of capital outflow from emerging economies and triggering a global market liquidity crisis. On the other hand, the adjustment of US economic policies undermines the stability of global value chains, directly affecting industrial development, price, and employment stability in other parts of the world.
In conclusion, the US economy is facing massive headwinds, such as soaring interest rates, high inflation, the withdrawal of fiscal stimulus, and weak overseas export markets. Furthermore, the recession probability in 2023 is very high after the Fed raises interest rates sharply.
Source: Toms Balmforth