The US economy may experience a mild recession like the one that occurred in the 1990s, according to a report released on Tuesday by Fitch Ratings. This recession is expected to start in the spring of 2023.
According to the credit rating agency, this recession will be brought on by a combination of persistent inflation and the US Central Bank’s three consecutive interest rate increases. The survey also indicated that the US GDP may expand at a modest 0.5% annual rate, which was a full percentage point slower than the June forecast.
According to Fitch, high inflation will “be too much of a drain” on household income in 2023 and reduce consumer spending to the point where it triggers a downturn in the second quarter of 2023. One of the top three credit rating companies in the world, Fitch, evaluates the ability of businesses and countries to repay their debt, giving investors important direction.
The world’s largest economy is about to enter a recession. The next recession, though, might not be as severe as the previous two significant ones, which is a bright spot. The US is expected to be quite light, according to Fitch Rating experts.
Consumers will soften the damage, says Fitch
The credit rating agency said that because consumers are not as heavily indebted as in the past, the United States enters this challenging moment from a position of strength. According to researchers at Fitch Ratings, “US household finances are substantially stronger now than they were in 2008, the banking sector is healthier, and there is little sign of overbuilding in the housing market.”
The Great Recession, which started in late 2007, was the greatest economic crisis since the Great Depression and almost brought the financial system to its knees. Early in 2020, the Covid recession started, which led the unemployment rate to soar to around 15%. However, according to Fitch Ratings, the unemployment rate would increase from its current level of 3.5% to a maximum of 5.4% by 2024.
Millions of jobs would be lost under such a scenario, but not nearly as many as during the previous two recessions, which would imply an increase of 1.9 percentage points from current levels: During the Covid recession and the Great Recession, the unemployment rate increased by 11.2 and 5.6 percentage points, respectively. After the recession of 1990–1991, the rate went up by 2.8 percentage points.
The research stated that Fitch Ratings anticipates a very strong consumer balance sheet and the healthiest labor market in decades to mitigate the effects of a potential recession. The labor market is still extremely tight, with the supply of workers falling short of the demand for workers despite growing recession fears. There are more available positions than there are firings.
Similarities with the recession of 1990
Fitch predicts that the subsequent recession will “broadly resemble” the one that began in July 1990 and ended in March 1991. There are fascinating parallels between the present and the early 1990s. The 1990 recession happened when the Fed hurriedly raised interest rates to combat inflation, much as today.
The oil shock caused by the conflict preceded that decline as well. The Iraqi invasion of Kuwait at the time increased American gas and energy costs. The invasion of Ukraine by Russia, which has increased food costs as well, is largely to blame for the current period of high energy prices.
Inflation is still the biggest problem
The US economy’s primary problem continues to be inflation. Workers’ salaries are losing value due to the high cost of living, and consumer confidence is declining. The Federal Reserve has also put the brakes on the economy by sharply hiking interest rates in response to persistent inflation. Voters are currently quite concerned about the health of the economy. According to a survey by New York Times, 44% of likely voters believe that economic worries are the most crucial problem.
The likelihood of a recession in the next 12 months is therefore estimated by analysts in a separate study from The Wall Street Journal to be 63%, which is the highest level in more than two years. According to Jamie Dimon, CEO of JPMorgan Chase, a recession is likely to occur by the middle of next year due to a “very, very serious” combination of issues.
Because US corporations are carrying more debt relative to the size of the economy than they did thirty years ago, according to Fitch Ratings, there is still a chance that the current recession will be worse than the one that started in 1990. The impact of the Fed’s efforts to reduce its $9 trillion balance sheet was also noted in the study as being “very unknown.”
The labor market, where the unemployment rate is tied for the lowest level since 1969, is the economy’s main source of optimism. Fed officials anticipate a rise in the unemployment rate in the upcoming quarters, while Bank of America has issued a warning that the US economy will lose 175,000 jobs each month in the first quarter of 2019.