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Uncertainty Surrounding Recession: A Lack of Agreement on the Probability of an Economic Decline.

Officially, there is now a consensus on the uncertainty surrounding the possibility of a recession in the U.S. economy, a stark contrast to the more definitive predictions earlier this year.

In March 2022, the Federal Reserve raised interest rates for the first time in the current tightening cycle, and at that time, economists surveyed by Reuters estimated a 25% chance of a recession in the next 12 months, with a 40% likelihood within two years.

However, by October 2022, the outlook had become increasingly pessimistic, with economists indicating a 65% chance of a recession within a year. A subsequent Reuters poll in March of the following year revealed a consistent 65% probability of a recession within two years.

Yet, a noteworthy shift occurred as a number of influential voices, who had previously predicted a looming recession, changed their tune. Among them was Michael Gapen, the chief U.S. economist at Bank of America. In July 2022, Gapen was forecasting an impending recession, but by August of the current year, his stance had evolved.

Gapen explained his revised outlook, stating, “Incoming data has made us reassess our prior view. We revise our outlook in favor of a ‘soft landing,’ where growth falls below trend in 2024 but remains positive throughout”.

Despite this shift, not all economists have adjusted their views accordingly. Many analysts still maintain that a recession remains a distinct possibility in the near future.

This lack of consensus creates a challenging environment for consumers and retirement savers. Navigating the economic landscape is complex when there is a consensus on its trajectory, but it becomes even more daunting when such agreement is lacking.

In the upcoming week, we will explore the perspectives of those who anticipate an impending recession and those who believe it will pass. Moreover, we will address how consumers and savers can approach the situation when even the experts on the economy do not concur on its future course.

But before delving into those matters, let’s first consider the current outlook of economists.

Bloomberg Economics: While a Soft Landing Remains a Possibility, It’s Not the Most Probable Scenario.

Bloomberg Economics maintains that a recession continues to be its central economic scenario. This viewpoint is grounded in several key factors, one of which is the delayed impact of the Federal Reserve’s rigorous rate-hike policy.

Bloomberg argues that it typically takes 18 to 24 months for rate increases to substantially affect variables such as the unemployment rate. Thus, the full implications of the cumulative 525-basis-point rate hike (up to this point) may not manifest until the end of the current year, at the earliest.

Moreover, the prospect of further rate hikes by the Federal Reserve is not to be dismissed. According to the most recent Fed projections, central bankers are intending to implement one more rate increase before concluding their hiking cycle this year.

Bloomberg Economics underscores that the concerns about inflation persist for various reasons, regardless of the ongoing rate-hike impact delay. This includes the emergence of new economic threats, such as the potential for an extended autoworkers strike, the resumption of student-loan payments, a surge in oil prices, and the real possibility of a contentious government shutdown.

Global economic slowdowns, already underway in critical regions, are another significant contributor to Bloomberg’s recession projection. They cite the real estate crisis in China and a drop in lending within the Eurozone as factors that will affect the U.S. economy. Notably, the decline in lending in the Eurozone is occurring at a swifter rate than during the sovereign debt crisis from 2009 to the late 2010s.

Another less-discussed aspect contributing to Bloomberg’s recession outlook is the findings from the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS). The survey indicates that approximately half of the country’s large and mid-sized banks are tightening access to commercial and industrial loans. Bloomberg Economics anticipates this will have an impact during the fourth quarter, marking the most significant restriction since the financial crisis (excluding the pandemic).

Summing up, while a soft landing is a conceivable outcome, Bloomberg Economics deems it less probable. With the confluence of Federal Reserve rate hikes, potential auto strikes, student loan repayments, rising oil prices, and a global economic deceleration, a recession appears more likely in their assessment.

Others sharing the view of an impending recession include The Conference Board, whose principal economist, Erik Lundh, envisions an economic downturn in early 2024. Lundh attributes this forecast to a multitude of factors, including elevated inflation, high interest rates, diminishing pandemic savings, increasing consumer debt, reduced government spending, and the resumption of mandatory student loan repayments.

Regarding the rosy outlook for consumer spending as an indicator of economic health, Lundh expresses skepticism, noting that “this trend cannot hold.” He points out that compensation growth is slowing, pandemic savings are depleting, and household debt is on the rise. Additionally, the impact of new student loan repayment obligations will begin affecting many consumers starting in October.

The Conference Board’s projection for real GDP growth in 2024 stands at a modest 0.8%.

The perspective of those who argue against the likelihood of a recession occurring is worth exploring.

Federal Reserve President Bostic: Recession Is Not in Sight, and Current Rates Are Adequately Restrictive.

Notably, the analysts at Goldman Sachs are among the prominent advocates of the “no-recession” perspective.

In a recent research report, Goldman analysts asserted that the likelihood of the United States encountering a recession within the coming year stands at just 15%. Importantly, this figure aligns with the historical average chances of a recession materializing in any given year.

The report challenges the notion that the economy is destined for an unfavorable outcome due to the eventual repercussions of elevated interest rates. The analysts emphatically disagree with the idea that the “long and variable lags” associated with monetary policy will steer the economy towards a recession. Instead, they believe that the influence of monetary policy tightening will steadily diminish, ultimately vanishing entirely by early 2024.

Jan Hatzius, Chief U.S. Economist at Goldman Sachs, is of the opinion that the Federal Reserve has concluded its interest rate hikes.

Even the recent upswing in Treasury yields, according to Goldman analysts, is unlikely to trigger a recession. In a recent note, they stated that the primary consequence of the tightening financial conditions brought about by rising rates is an extended drag on GDP growth. They anticipate a potential half-percentage point decline in U.S. GDP growth over the next year. While they acknowledge this decline as “meaningful,” Goldman economists maintain that it is “too small to threaten a recession”.

Atlanta Federal Reserve Bank President Raphael Bostic expressed a similar viewpoint when addressing the American Bankers Association. He indicated that he foresees no need for further interest rate increases and does not anticipate a recession on the economic horizon. Bostic emphasized that additional rate hikes are unnecessary for the central bank to achieve its 2% inflation target. He believes that current rates are sufficiently restrictive. Bostic also concurs with Bloomberg Economics regarding the delayed impact of rate hikes, but he is confident in the economy’s strength to absorb that impact without succumbing to a recession.

Furthermore, in its latest quarterly economic forecast released the previous week, the highly regarded UCLA Anderson Forecast acknowledged weaknesses in the 2024 economy but did not anticipate a recession.

UCLA Anderson Forecast: Worries Over Recent Risk Events May Be Overstated.

To begin, UCLA Anderson Forecast perceives the potential consequences of recent risk factors, such as the autoworkers’ strike and the potential government shutdown, as relatively limited. In contrast to those who anticipate a cumulative impact from these events, UCLA Anderson economists treat them as discrete occurrences and assess their potential effects accordingly.

Drawing from historical precedents of such events, they have made only minor adjustments, trimming a few tenths of a percentage point from the GDP growth forecast.

Similar to the perspectives of Goldman Sachs and Raphael Bostic, UCLA Anderson believes that the current mix of economic output, declining inflation, and monetary policy is well-balanced, reducing the likelihood of a recession. They do anticipate the Federal Reserve implementing the widely expected 25-basis-point rate hike later this year but do not foresee further tightening.

While acknowledging that “the impact of higher interest rates will constrain growth in 2024,” they anticipate that as the Federal Reserve shifts its focus away from aggressive interest rate increases and inflation gradually returns to an annual rate of under 3%, the forecast suggests a neutral stance from the Fed and a return to trend-rate economic growth.

Thus, these are the two sides of the “recession argument,” both presented by highly reputable sources.

It’s worth noting that seldom have well-qualified economists and analysts been so sharply divided on the short-term economic outlook. As we near the conclusion of this year, it’s apparent that uncertainty has been the dominant theme, as suggested by Augusta Precious Metals’ director of education at the beginning of 2023. This year’s events have indeed underscored the aptness of the term “uncertainty.”

Regarding how retirement savers can navigate this climate of uncertainty, let’s briefly discuss that as we conclude.

The high level of uncertainty may necessitate a reevaluation of investment strategies.

For consumers and those planning for retirement, the prevailing uncertainty carries more weight than just a mere talking point. It presents a substantial obstacle to the stability of their personal finances, making it a matter worth addressing.

Uncertainty inherently signifies a departure from the usual confidence about the future. In such circumstances, the avenues available to mitigate the potential impact of this uncertainty on financial well-being may appear more restricted. When you lack a clear vision of what lies ahead, how do you proceed with prudence?

However, this challenge does not imply that individuals have no means to proactively protect their financial interests. Some people opt to include in their portfolios assets that have historically shown resilience during periods of economic ambiguity and volatility.

One such asset class is precious metals, with gold being a notable example. Over the past 15 years, a period marked by a consistent rise in global economic uncertainty, gold has proven to be a fundamentally uncorrelated asset. Since the turn of the millennium, the price of gold has appreciated by nearly 600%.

It’s important to acknowledge that gold and silver may not suit everyone as asset choices. Nevertheless, the reality of uncertainty characterizes the current economic landscape, and for some individuals, this might be an opportune moment to explore ways to mitigate potential repercussions, rather than letting the effects of uncertainty go unchallenged.

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Title:  Economic Uncertainty: Recession Views & Investments

Description:  Experts’ divided opinions on a U.S. recession create uncertainty. Explore economic outlooks and strategies for navigating this landscape

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