Wall Street is predicting a 2023 recession. Here are the red flags you should know about
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 dollars 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 dollars—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.