US Economy Faces Impending Recession: Warning Signs Abound

Despite the resilience of the American consumer, there are concerns that the US economy may face a recession within the next nine months, as outlined in a recent report by Raymond James' Chief Investment Officer, Larry Adam.

Wall Street's predictions of a potential recession have consistently been pushed further into the future due to consumers' continued robust spending habits and their overall solid financial position. However, a combination of several risk factors leads Adam to believe that the economy may be unable to avoid a mild recession in the coming year.

These are the three warning signs he is closely monitoring ahead of a potential recession:

Growing Headwinds for Consumers:

    • Various challenges, including the resumption of student loan payments and elevated borrowing costs, create risks for everyday consumers.

    • The tailwinds that fueled strong consumer spending during the pandemic are dissipating, and the excess savings accumulated by consumers have been broadly used up.

    • While consumers currently have jobs and income, their ability to continue spending without restraint is diminishing. Bank of America CEO Brian Moynihan has noted that consumer spending now resembles the levels seen in a low-inflation, low-growth economy before the pandemic. Additionally, increasing credit card debt and rising delinquencies indicate that more Americans are falling behind on debt obligations.

High Borrowing Costs:

    • Elevated borrowing costs for items such as cars, homes, and credit cards threaten economic growth, particularly if these high costs persist for an extended period.

    • The ongoing affordability crisis in the housing market suggests that real estate activity in the residential sector will remain sluggish, impacting homebuilder confidence, which has reached its lowest point since January.

    • Consumers are addressing this situation by turning to adjustable-rate mortgages, constituting nearly 10% of new home loans.

    • Higher interest rates also affect business capital expenditure plans, with regional Federal Reserve surveys indicating that business capex spending intentions for the next six months are at their second-lowest level in the post-COVID era.

Building Macro Risks:

    • Various macroeconomic risks are rising, including elevated gas prices, conflicts in the Middle East, and a decline in consumer sentiment.

    • The Conference Board's Expectations Index has reached its lowest point in four months, historically signalling an impending recession within the following year. This index measures consumers' outlook on the short-term prospects for the economy and the job market.

    • These risks will likely impact consumer spending as the crucial holiday season approaches, and potential disruptions from ongoing autoworkers' strikes and a temporary federal government shutdown in mid-November could further weaken economic growth.

In conclusion, while the American consumer has shown remarkable resilience, these warning signs, including consumer challenges, high borrowing costs, and growing macro risks, collectively suggest the potential for a recession within the next nine months.

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