Many economists believe that the issue about a recession in America is not if one will start but when. JPMorgan CEO Jamie Dimon predicts the downturn will start as soon as six months from now. Former Treasury Secretary Larry Summers forecasted it would happen sooner. Summers also says U.S. unemployment will need to hit between 5.5% and 7.5% to cool inflation. That means hundreds of thousands of jobs will be lost next year. A new Bank of America analysis says the rate will reach 150,000 lost jobs monthly.
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The reason for the forecast is that, according to a CNN interview with Michael Gapen, head of U.S. economics at Bank of America: “The premise is a harder landing rather than a softer one. “We are looking for a recession to begin in the first half of next year.” The anxiety about a landing has started to spread. The premise behind the prediction is that inflation is so high, at a consumer price index increase of over 8% per month, that Americans will not be able to afford discretionary spending. Some middle and lower-class families may struggle with essentials.
Add to inflation the fact that the Federal Reserve has raised rates aggressively this year and will continue to do so. High-interest rates will undermine demand for mortgages, car loans and credit card purchases. The lack of economic activity will cause the U.S. economy to run out of gas.
Corporations have confirmed the recession forecast by releasing forward-looking statements about their earnings. Margins are starting to become compressed. Companies have rising labor costs and more expenses driven by inflation. However, they do have the pricing power to offset these by charging higher prices. The most harrowing example is new predictions that U.S. car companies could have sharp drops in earnings next year. Profits could drop by half in the industry, or they could even be hammered into losses.
24/7 Wall St.This recession will be very different from the one triggered by the early months of the COVID-19 pandemic. In that case, extraordinary circumstances were the cause. In this case, it will be caused by some of the oldest threats to economies: inflation and high-interest rates.
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