US Recession Monitor – Must be the season of the risks

While the economy has expanded throughout 2023, uncertainty remains high and we are not ready to remove a recession from our baseline forecast. A range of idiosyncratic risks, including the United Auto Workers strike, a potential government shutdown, and higher oil prices are all small individually, but taken as a whole with the latest tightening of financial conditions, may be too much for the economy to handle.

What you will learn:

• Recent revisions to the national accounts did little to change the outlook. The remaining stock of excess savings is higher than estimated but has been spent at a slower pace over the past year. We still think consumer spending is set to weaken as higher gas prices, the resumption of student debt payments, and a slowing labor market weaken growth in disposable income. Higher interest rates and tighter lending conditions will hit rate-sensitive spending into year-end.
• While we expect the Fed to look past the recent volatility in the energy market, continued strength in the labor market could lead to persistence in wage growth and forestall declines in consumption growth, which would leave price pressures elevated and growth above trend. With the Fed committed to returning inflation back to its long-run target of 2%, this would raise the odds of rate increases this year, extend the duration of restrictive monetary policy, and increase the chances of a recession occurring down the road.