Unemployment Will Rise And ‘Extreme’ Price Pressures Continue As Fed Hikes Risk Recession, S&P Warns

Topline

Economists at S&P Global Ratings on Monday warned the likelihood of a recession over the next year is increasing as the Federal Reserve continues its most aggressive economic tightening cycle in decades—becoming the latest experts warning about the potential implications of rising interest rates, which help ease prices at the expense of economic growth.

Key Facts

In a research note published Monday, a team of economists led by S&P’s Beth Ann Bovino said aggressive Fed policy spurred by ongoing price spikes will usher in low economic growth this year and potentially risk a recession, defined as two consecutive quarters of negative gross domestic product.

S&P forecasts that U.S. GDP will grow at an annual rate of 2.4% this year and 1.6% next year—down from forecasts last month calling for growth of 2.4% and 2%, respectively.

Even the labor market, which has posted a remarkably strong recovery from the pandemic recession two years ago, will struggle as Fed hikes continue, the economists said, predicting the unemployment rate will rise from 3.6% last month to 4.3% by the end of 2023 and more than 5% by the end of 2025—potentially wiping out the past year’s gains.

“As we inch toward potential recession, we expect the Fed’s stronger action to slow hiring and raise unemployment,” the economists wrote, cautioning that the central bank’s “cure” for the U.S. economy “may feel worse than the disease.”

Though S&P said the economy has enough momentum to avoid a recession this year, it warned “what’s around the bend next year is the bigger worry,” putting the odds of a recession in 2023 at 40%—more than the 35% odds Morgan Stanley issued last week.

Some have been more optimistic: In a recent note, LPL Financial analysts said the odds of a recession are likely closer to 33%, if not lower, given that corporate earnings are healthy and inflation pressures are likely to ease, even if the “process to get there isn’t smooth for markets.”

Crucial Quote

“Economic momentum will likely protect the U.S economy from recession in 2022,” S&P economists said Monday. “But, with supply-chain disruptions worsening as the weight of extremely high prices damage purchasing power and aggressive Federal Reserve policy increases borrowing costs, it’s hard to see the economy walking out of 2023 unscathed.”

Key Background

The Fed’s withdrawal of pandemic stimulus measures has tanked stocks and sparked growing fears of a recession. Major stock indexes plunged into bear market territory earlier this month ahead of the Fed’s largest interest rate hike in 28 years, and the gloomy sentiment has ushered in waves of layoffs among recently booming technology and real estate companies. “We don’t believe the Fed can stop the issues that are causing inflation on the supply side without absolutely wrecking the economy, but at this point, it looks like they are resigned to the fact that it must be done,” says Brett Ewing, chief market strategist of First Franklin Financial Services.

Big Number

8.6%. That’s how quickly consumer prices rose in the 12 months ending in May, eclipsing economist projections calling for a monthly decline and instead returning to the highest level since 1981.

Further Reading

Why A Strong Dollar And Retail Inventory Blunders Could Help Push Inflation Down By Next Year (Forbes)

Stock Market Could Crash Another 20% If US Plunges Into Recession—These Industries Are Most At Risk (Forbes)

‘Worst Fears Confirmed’ As Fed ‘Plays Dangerous Game’ With Inflation And Rate Hikes (Forbes)