Two-thirds of economists at the largest US financial institutions believe a recession will occur in 2023, according to a new survey.
The Wall Street Journal survey of 23 primary dealers, the large financial firms that do business directly with the Federal Reserve, found a majority expect a recession in the coming year.
Among the top economic concerns cited included dwindling personal savings, the decline in the housing market, and tightening lending standards at many banks.
It follows the Fed’s rapid rate hikes to battle soaring inflation last year, which saw the benchmark rate rise from near zero in March to a range of 4.25 percent to 4.5 percent by the end of the year.
A majority of economists at the largest banks, including Bank of America, Barclays and UBS, are predicting a recession in 2023 amid rising warning signs
Rising prices have forced consumers to rapidly spend down savings, which soared during the COVID-19 pandemic
The Fed rapidly raised interest rates in 2022 to fight inflation, increasing recession risks
The central bank forecasts that will reach a range of 5 percent to 5.25 percent by the end of 2023. Its forecast doesn’t call for a rate cut before 2024.
The Fed policy rate is now at its highest level since prior to the 2008 recession, as the central bank attempts to bring inflation down without triggering an economic downturn.
By the Fed’s preferred measure, inflation is still running nearly three times its 2 percent goal, having risen earlier in 2022 at its fastest pace in 40 years.
Rising prices have forced consumers to rapidly spend down savings, which soared during the COVID-19 pandemic thanks to stimulus measures and a slowdown in spending.
The consumer price index rose at the fastest rate in 40 years earlier in 2022
The personal savings rate dropped to 2.4 percent in November, far below the pre-pandemic average of 8.8 percent in 2019.
Consumers have also increasingly been tapping lines of credit to make ends meet.
Total household borrowing reached $16.51 trillion in the third quarter, a $351 billion increase from the prior quarter and 8.3 percent jump from a year ago, the fastest annual increase in 14 years, according to Fed data.
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Higher interest rates have had the most dramatic impact on the housing market, which saw a plunge in sales activity in the second half of last year.
Household wealth (black line) dropped another $400 billion in the third quarter, to $143 trillion, marking the third straight quarterly decline
Total household borrowing reached $16.51 trillion in the third quarter, a $351 billion increase from the prior quarter and 8.3 percent jump from a year ago
The 30-year fixed mortgage rate breached 7 percent in October for the first time since 2002, more than doubling in the span of nine months.
It has deflated a red-hot housing market fueled by historically low borrowing costs and a rush to the suburbs during the pandemic.
Existing home sales fell 7.7 percent in November from October, according to the National Association of Realtors – and November sales dropped a whopping 35.4 percent year-over-year.
The NAR added that the current ten-month streak of declines is the longest on record in the data that dates back to 1999.
Banks have also tightened their lending standards in recent months, a traditional leading indicator of recession.
Existing home sales fell 35.4 from a year ago. For a large variety of reasons, including the doubling of the 30-year mortgage rate, Americans are refraining from purchasing homes
Of the primary dealers surveyed by the Journal, only five said they do not expect a recession in 2023 or 2024: Credit Suisse, Goldman Sachs, HSBC, JPMorgan Chase and Morgan Stanley.
Credit Suisse Senior US Economist Jeremy Schwartz wrote in the bank’s 2023 outlook: ‘Several historically reliable lead indicators are sending recession signals, but in our view these measures are unable to correctly gauge recession risk in the current environment.’
Indeed, the economy’s conflicting signals since the pandemic have baffled many economists.
The unemployment rate remains quite low at 3.7 percent. Fed policymakers project it to rise to 4.4 percent this year.
The stock market spent much of 2022 bracing for a downturn. The benchmark S&P 500 index finished the year with a loss of 19.4 percent.
It’s just its third annual decline since the financial crisis 14 years ago and a painful reversal for investors after the S&P 500 notched a gain of nearly 27 percent in 2021.
All told, the index lost $8.2 trillion in value, according to S&P Dow Jones Indices.
