Research Briefing | Apr 5, 2023

US Recession Monitor – Banking stress will test the economy

The sharp fall in our US business cycle indicator in February signalled the economy lost momentum midway through Q1. All six of the underlying indicators were weaker, led lower by a substantial reduction in real manufacturing activity. Real personal spending and incomes, meanwhile, lost the least ground.

What you will learn:

  • Recent instability in the US banking system could increase the severity and duration of the recession that we expect to start in Q3. This is because the economic costs of the stress in the banking system won’t be fully felt for several months as banks tighten lending standards and reduce the availability of credit to households and businesses.
  • Our analysis suggests a sudden tightening in lending standards would pose a peak drag of 0.7ppts on GDP growth later this year. The Fed’s upcoming Senior Loan Officer Opinion Survey, to be released in May, will help us determine the fallout from the recent turmoil in the banking system.
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