New economic modeling shows that there is a near certainty that the economy will enter a recession within the next year.
There is now a 100% chance of a recession in the United States by October of next year, according to new economic modeling by Bloomberg that was released on Monday. That is up from 65% for the same period of time in the previous iteration of the model, something that is certain to ring alarm bells for investors and economists.
The news comes as the Federal Reserve continues its most aggressive tightening cycle since the Great Inflation of the 1970s and 1980s. The central bank has hiked rates by 75 basis points during its last three meetings, analogous to nine traditional increases in just a span of months.
Still, the Fed’s rate hikes have so far failed to bring down inflation. Inflation clocked in worse than expected at 8.2% for the 12 months ending in September, according to the consumer price index released last week.
FED SUFFERS ANOTHER SETBACK IN EFFORTS TO CURB INFLATION
The stubbornly high inflation means the Fed will have to keep raising rates aggressively to tame the high prices, an action that causes demand to dwindle and the economy to cool off, possibly even to the point of recession.
“The risk of an even more aggressive pace of rate hikes than we currently expect has risen, which would weigh even more heavily on growth in 2023 (we currently forecast negligible growth of 0.2% year on year in 2023, as the economy experiences a mild recession),” said Cailin Birch, a global economist at Economist Intelligence Unit.
While the Bloomberg modeling is now assigning a 100% chance of a recession, a separate survey of economists showed a little more room for the economy to avoid the scenario. The survey of 42 economists found that the probability of a recession over the next 12 months is at 60%, a figure that is up from the 50% odds assigned by those surveyed a month ago.
A recession would be bad news for the Biden administration and for Democratic members of Congress. Inflation is already the biggest issue facing voters heading into the midterm elections, and Republicans are hoping to capitalize on the higher prices in order to wrest back control of the House and Senate.
If inflation continues to remain as sticky as it has and the economy craters into a full-blown recession, it would undoubtedly be used as a cudgel against Biden and Democratic policies in the coming months and years as the GOP pushes to win back the White House in 2024.
There are already some signs that the economy has begun to be whacked by the rising interest rates.
The Bureau of Economic Analysis announced in a final estimate that U.S. gross domestic product fell at a 0.6% annualized rate in the second quarter. That came after negative 1.6% GDP growth in the first quarter — bad news for the economy because two-quarters of negative GDP growth typically defines a recession.
Government officials, economists, and many others use recession designations provided by the National Bureau of Economic Research, a private academic group. The bureau doesn’t provide a concrete definition. Rather, it relies on the judgment of a group of economists.
The group broadly defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
In other bad news, many economists have already acknowledged that the housing market, which is the sector most reactive to interest rate increases, is already in recessionary conditions.
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Still, there is a major bright spot that is holding the economy back from a recession: the hot labor market. Conventional wisdom is that when rates rise, so does the country’s unemployment. But despite the increases, the economy has kept adding jobs, and the unemployment rate has been at a historically low level.
The economy notched 263,000 new jobs last month, according to the Bureau of Labor Statistics. Monthly job growth has averaged 420,000 so far in 2022, a strong pace at this stage of the cycle.
