Better Late Than Never: Big Banks Predict Recession for the U.S.

List of Big Banks Calling for Recession in U.S. Keeps Expanding

A recession in the U.S. economy could become a reality sooner rather than later.

Drumroll, please.

Big banks are starting to talk recession now. Keep in mind, in economic terms, a recession is when the gross domestic product (GDP) contracts in two consecutive quarters. In broader terms, it’s a rigorous slowdown in economic activity.

Deutsche Bank AG (NYSE:DB) was the first bank to predict a recession in the U.S. economy. In early April, Matthew Luzzetti, a senior economist at the giant European bank, said, “We no longer see the Fed achieving a soft landing. Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession.” (Source: “Deutsche Bank Is the First Big Bank to Forecast a US Recession,” CNN Business, April 5, 2022.)

Next up, the chief investment strategist of Bank of America Corp (NYSE:BAC), Michael Hartnett, said U.S. economic conditions are deteriorating quickly, which could push the economy into recession. “’Inflation shock’ worsening, ‘rates shock’ just beginning, ‘recession shock’ coming,” wrote Harnett. (Source: “A “Recession Shock” Is Coming, BofA Warns,” Reuters, April 8, 2022.)

More recently, economists at Goldman Sachs Group Inc (NYSE:GS) said the odds of a recession in the U.S. economy within the next two years stand at 35%. The chief economist at the investment bank, Jan Hatzius, said, “Taken at face value, these historical patterns suggest the Fed faces a hard path to a soft landing.” (Source: “Goldman Sachs Sees U.S. Recession Odds at 35% in Next Two Years,” BNN Bloomberg, April 17, 2022.)

It’s Not Just the Banks Forecasting a Recession

Fannie Mae, a U.S. government-sponsored mortgage lender, thinks there could be a modest recession in 2023. The chief economist at the lender, Doug Duncan, said, “We continue to see multiple drivers of economic growth through 2022, but the need to rein in inflation, combined with other economic indicators, such as the recent inversion of the Treasury yield curve, led us to meaningfully downgrade our expectations for economic growth in 2023.” (Source: “US Economy Facing ‘Modest’ Recession Next Year, Fannie Mae Says,” Fox Business, April 20, 2022.)

The International Monetary Fund (IMF) has been turning pessimistic about U.S. economic growth as well. Just recently, the IMF provided its outlook, expecting the U.S. economy to register growth of 3.7% in 2022 and 2.3% in 2023. These figures were revised lower from the IMF’s January estimates. These estimates tend to be very optimistic earlier in the year and get revised lower as more data is available. (Source: “War Dims Global Economic Outlook as Inflation Accelerates,” International Monetary Fund, April 19, 2022.)

What’s Ahead for the U.S. Economy? 

The list of banks and other organizations predicting an economic slowdown in the U.S. will likely get bigger. If you’re a regular Lombardi Letter reader, these calls for a recession in the U.S. economy shouldn’t be surprising whatsoever. I’ve warned about an upcoming recession several times here already, well before the big banks started doing the same.

Why will we see a recession in the U.S. economy? While the big banks talk about the Federal Reserve’s interest rate policy as the main catalyst for a recession, I believe there’s more to it than that. You see, consumers in the U.S. economy aren’t in great financial shape. Their savings have been draining thanks to inflation and stagnant incomes. This is like throwing gas on the already raging fire that is rising interest rates.

I think the next few quarters will be critical. More economic data will tell us how things are looking for the U.S. economy. I’ll be keeping a close watch on data sets like retail sales, business inventories, construction spending, saving rates, incomes, and housing market statistics.

5 Pointers for Investors if There’s a Recession

Here are five things investors need to know if a recession becomes a reality:

1. Inflation in the U.S. economy is currently at a 40-year high. The Federal Reserve is trying to curb it, but there are price pressures due to supply chain issues and a significant increase in commodity prices. If the economy starts slowing down but the inflation doesn’t, we could be in for a period of stagflation, which would likely be detrimental to individuals and businesses.
2. The Federal Reserve could change its higher-interest-rate rhetoric very quickly and could even start cutting rates. With the next recession, it could cost a lot more to fix the economy than it did with the previous economic slowdown. It’s possible that, in the next recession, we’ll get negative interest rates and extreme levels of money-printing.
3. Stock markets tend to look forward. Right now, investors are hopeful that things will be relatively fine. The key stock indices haven’t lost a lot of steam so far. However, once the data start to show that a slowdown is brewing, don’t be shocked if investors rush for the exits and we get a quick and gruesome stock market crash.
4. If there are shocks to the economy and volatility for interest rates, be very careful. The odds of a recession triggering a financial crisis will increase. This could have dire consequences across the board.
5. Where’s the opportunity? Going into a recession, consumer-defensive and utility stocks tend to do well, while consumer-discretionary, industrial, and basic-material stocks tend to do poorly. Mind you, this isn’t a recommendation to buy or sell shares.