USA (Washington Insider Magazine)— The American economy is not as strong as we all thought. Growth has slowed to stall speed over the last four months. It looks like a hardish landing after all.
Citigroup Warns of Recession
The US has already faced a recession, according to Citigroup, which is the first major American bank to issue such a warning. If the Federal Reserve doesn’t act quickly, once this process starts, it could quickly spiral out of control and result in widespread corporate layoffs.
Federal Reserve’s Stance on Inflation
Despite the economic slowdown, some Federal Reserve officials remain focused on combating inflation, a stance reminiscent of former Fed Chair Paul Volcker. This approach raises concerns about the Fed’s ability to respond adequately to the emerging recession.
Impact on Bonds and Unemployment
According to Telgraph, if the recession forecast holds true, U.S. Treasuries, German Bunds, and UK Gilts are currently mispriced, as are BBB junk bonds. Hollenhorst predicts a contraction of 0.3% and 2.1% (annualized) over the next two quarters, coupled with significant declines in business equipment investment. This downturn is expected to push unemployment to 5.5% by year-end.
Global Economic Repercussions
A severe recession in the United States would have an immediate impact on Britain and the eurozone due to the global financial system’s interconnectedness. The incoming British administration may face an economic crisis, demanding spending cuts and tougher fiscal policies. Fiscal austerity and the European Central Bank’s tight monetary policies could further hamper the eurozone’s already sluggish recovery.
Investor Strategies Amid Economic Uncertainty
Investors must navigate these challenging conditions carefully. Well-timed Federal Reserve rate cuts could boost stock markets, but delayed actions might worsen recessionary forces. Bank of America’s Andrew Harnett advises shifting investments from equities to bonds in the latter half of the year.
Labor Market and Consumer Spending Decline
Revised data indicates a weaker U.S. labor market, with the hiring rate at its lowest in a decade. Businesses are holding onto workers but reducing hours. Consumer spending is also showing signs of strain, particularly in sectors like manufacturing and restaurants.
Monetary and Fiscal Challenges
Two additional monetary issues add to the economic concerns: the U.S. Treasury’s shift from short-term bills to longer-term funding and its efforts to rebuild cash reserves at the Fed. These actions are expected to have contractionary effects on the economy.
Mounting Debt and Fiscal Deficit
America’s economic boom has declined despite stimulus efforts like the Inflation Reduction Act. Real disposable income per capita has decreased, and many Americans have exhausted their pandemic-era savings and are now relying on credit. Delinquent credit card debt has surged, particularly in poorer areas.
Rising National Debt
The U.S. debt ratio has significantly increased, driven by extensive spending under both the Trump and Biden administrations. The International Monetary Fund projects the gross debt ratio could reach 134% of GDP by 2029, potentially exceeding 140% if a recession occurs.
Conclusion
The United States has the dual problems of navigating a recession and dealing with an escalating debt issue as its economy contracts. To minimize the possible consequences, officials and investors must navigate the economic landscape carefully.
