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The US economy added nearly half a million jobs in March. The Dow Jones industrial average is within 6% of its record high. And US households accumulated roughly $2.5 trillion in excess savings throughout the pandemic. |
Still, despite all the good news, predictions of an impending recession are widespread on Wall Street. |
Billionaire investors, former Federal Reserve officials, and now even investment banks have repeatedly warned that the economy may hit a wall in 2023. |
What’s driving the recent string of downtrodden economic forecasts? |
For some, it’s a matter of historical comparison. Former Treasury Secretary Lawrence Summers emphasized in a recent Washington Post op-ed that current economic conditions are undeniably reminiscent of previous pre-recession periods in US history. |
"Over the past 75 years, every time inflation has exceeded 4% and unemployment has gone below 5%, the US economy has gone into a recession within two years,” Summers wrote. |
Today, the US inflation rate is nearing 8%, and the unemployment rate fell to just 3.6% in March. As a result, Summers now sees an 80% chance of a US recession by next year. |
The economists noted that the war in Ukraine has disrupted global supply chains and dramatically increased commodity prices and energy costs in the US and EU. |
CIBC’s Pzegeo said that inflation can often lead to wealth destruction as well, especially when rising consumer prices outpace wage growth. |
"It acts as a tax. So give it a little bit of time in the economy, and it’ll eat away at your wealth and set the stage for a recession,” he said. |
Recent GDP forecasts from the Conference Board have also led to fears that a recession could be on the horizon. US real GDP growth is now expected to slow to an annual rate of just 1.7% in the first quarter of 2022, compared with 7% annual growth seen in the fourth quarter of 2020. |
For other economic forecasters, the Federal Reserve is the key to predictions of an impending recession. |
Now, with pandemic restrictions fading and inflation moving to highs not seen in four decades, the Fed is faced with a difficult task: ensuring a so-called soft landing for the US economy. The goal is to raise interest rates and end QE in order to cool economic growth and combat inflation—all without causing a recession. |
Investing legend Carl Icahn—the founder and chairman of Icahn Enterprises who boasts an estimated fortune of over $15 billion—said in a March interview he believes the Fed isn’t up for the job. |
"I really don’t know if they can engineer a soft landing,” Icahn said. “I think there’s going to be a rough landing.” |
The billionaire now believes the US economy will see a recession “or even worse” by the end of next year, and Deutsche Bank’s economists agree. |
"We no longer see the Fed achieving a soft landing. Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession,” the bank’s economists, led by Matthew Luzzetti, wrote in a recent note. |
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