Two-thirds of economists at the largest US financial institutions believe there will be a recession in 2023, according to a new survey.
The Wall Street Journal poll of 23 primary dealers, the big financial firms that do business directly with the Federal Reserve, found that a majority expect a recession in the coming year.
Key economic concerns included dwindling personal savings, the contraction in the housing market and tightening lending standards at many banks.
It follows the Fed’s rapid rate hikes to combat rising inflation last year, which saw the federal funds rate rise from near zero in March to a range of 4.25 percent to 4.5 percent by the end of the year.
The central bank forecasts it will reach a range of 5 percent to 5.25 percent by the end of 2023. Their forecast calls for no rate cut before 2024.
A majority of economists at the biggest banks, including Bank of America, Barclays and UBS, are predicting a recession in 2023 amid mounting warning signs
Soaring prices have forced consumers to quickly spend savings that have skyrocketed during the COVID-19 pandemic
The Fed quickly hiked rates in 2022 to fight inflation, increasing recession risks
The Fed’s interest rate is now at its highest level since the 2008 recession as the central bank looks to lower inflation without triggering an economic downturn.
According to the Fed’s preferred measure, inflation is still nearly three times its 2 percent target after rising at the fastest pace in 40 years in early 2022.
Rising prices have forced consumers to quickly spend their savings, which have skyrocketed during the COVID-19 pandemic thanks to stimulus measures and a slowdown in spending.
The personal savings rate fell to 2.4 percent in November, well below the pre-pandemic average of 8.8 percent in 2019.
Consumers are also increasingly turning to lines of credit to make ends meet.
Total household debt hit $16.51 trillion in the third quarter, up $351 billion sequentially and jumping 8.3 percent year-on-year, the fastest annual increase in 14 years, according to the data the fed
The consumer price index rose in 2022 at its highest rate in 40 years
Household wealth (black line) fell another $400 billion to $143 trillion in the third quarter, marking the third straight quarterly decline
Total household debt reached $16.51 trillion in the third quarter, up $351 billion sequentially and up 8.3 percent year-on-year
Higher interest rates had the most dramatic impact on the housing market, which saw a slump in sales activity in the second half of last year.
The interest rate on 30-year fixed-rate mortgages broke through 7 percent in October for the first time since 2002 and has more than doubled in nine months.
It has drained a red-hot housing market fueled by historically low borrowing costs and a rush to the suburbs during the pandemic.
Existing home sales were down 7.7 percent in November from October, according to the National Association of Realtors — and November sales were down a whopping 35.4 percent year over year.
The NAR added that the current 10-month streak of declines is the longest recorded in the data since 1999.
Banks have also tightened their lending standards in recent months, a traditional leading indicator of a recession.
Existing home sales fell 35.4 percent from a year earlier. Americans are reluctant to buy homes for a variety of reasons, including the doubling of 30-year mortgage rates
Of the primary traders surveyed by the Journal, only five said they don’t expect a recession in 2023 or 2024: Credit Suisse, Goldman Sachs, HSBC, JPMorgan Chase, and Morgan Stanley.
Jeremy Schwartz, Senior US Economist at Credit Suisse, wrote in the bank’s 2023 Outlook: “Several historically reliable leading indicators are sending signals of recession, but in our view these metrics are inadequate to properly assess the risk of a recession in the current environment.”
In fact, the conflicting signals from the economy since the pandemic have stumped many economists.
The unemployment rate remains quite low at 3.7 percent. Fed policymakers are forecasting a rise to 4.4 percent this year.
The stock market spent much of 2022 preparing for a downturn. The leading index S&P 500 ended the year with a loss of 19.4 percent.
It’s only the third annual decline since the financial crisis 14 years ago and a painful reversal for investors after the S&P 500 posted a nearly 27 percent gain in 2021.
Overall, the index lost $8.2 trillion, according to the S&P Dow Jones Indices.