![]() ![]() History seems to support the idea that a soft landing for the economy is very challenging to pull off. It takes around 18 months for the full effect of rate hikes to make their way into the economy-and that’s where we are,” Green says. ![]() “The time lag for monetary policies is incredibly lengthy. Nigel Green, founder and CEO of deVere Group, says investors should be concerned about the potential delayed impact Fed rate hikes will have on the U.S. Rising credit card, mortgage, auto loan and other interest rates also reduce the amount of disposable income Americans have to spend in the economy, weighing on corporate earnings and stock prices. Looking ahead to the third quarter, analysts are expecting just 0.2% earnings growth. Energy sector earnings have been particularly weak, down 51.4% in the second quarter based on difficult year-over-year comparisons. S&P 500 companies are on track to report a 5.2% earnings decline for the second quarter, the largest decline in any quarter since the COVID-19 pandemic shutdowns in 2020. Interest rates are now at their highest level in 22 years-high interest rates weigh on both corporate earnings and economic growth. Meanwhile, the Fed raised interest rates again in July, bringing the target fed funds rate range up to 5.25% to 5.5%. In fact, the June core personal consumption expenditures price index-which excludes volatile food and energy prices, and is the Fed’s preferred inflation measure-was up 4.1% on an annual basis. The FOMC has made tremendous progress in bringing down inflation, but it remains well above the Fed’s 2% long-term goal. The Fed has also acknowledged the banking crisis in early 2023 tightened credit conditions, potentially making it more difficult for companies to secure loans. The Federal Open Markets Committee projected full-year 2023 GDP growth of just 1% back in June, suggesting economic growth could soon slow to a crawl. ![]() economic outlook has improved in recent months, but economists still see a difficult road ahead. Why Are Investors Worried About a Recession? However, July job growth missed economist estimates of 200,000 new jobs, and job growth has slowed down significantly over the past year. That type of job growth doesn’t typically coincide with a U.S. In fact, the economy added 187,000 jobs in July. companies are still hiring and consumers are still spending. The Bureau of Economic Analysis will be releasing its revised estimate for second-quarter GDP on August 30.Īs of this writing, U.S. The NBER’s definition of a recession is somewhat vague: “A significant decline in economic activity that is spread across the economy and that lasts more than a few months.” ![]() In the U.S., the National Bureau of Economic Research is tasked with officially calling U.S. By this common measure, there’s no recession in sight. GDP gained 2.4% in the second quarter of 2023, and the Atlanta GDPNow model is currently projecting another 3.5% gain in GDP in the third quarter as well. There is no universal definition, but analysts and investors commonly consider two consecutive quarters of contracting gross domestic product to be a recession. ultimately avoids a recession in 2023, the Fed’s aggressive monetary policy strategy from the past year and a half may only now be starting to have a negative impact on the economy. And just because the risk of a recession is fading, interest rates will remain higher for longer, meaning that investors should take a cautious approach to the market.Įven if the U.S. The Federal Reserve has warned over and over that its long campaign of rate hikes will slow economic growth, even if its most recent economic projections no longer foresee a recession. Other reliable indicators are flashing warning signs that the economy could still slump: Jobs data has started to fade, the yield curve remains inverted and experts are divided on whether a recession may have been delayed rather than avoided entirely. The New York Fed recession probability indicator shows there is still a 66% chance of a U.S. Inflation has trended consistently lower for months, but interest rates are at 20-year highs and a handful of economic indicators suggest the economy isn’t out of the woods just yet. Nevertheless, threats remain to this rosy scenario. This so-called “soft landing,” the sweet spot between cooling inflation and a still-growing economy, appears to be a real possibility. economy can avoid falling into recession in 2023. Investors are more and more confident that the U.S. ![]()
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