US Recession Chances Surge to 38%, Bloomberg Economics Model Says

The odds of a US recession in the next year are now roughly one-in-three after consumer sentiment hit a record low and interest rates surged, according to the latest forecasts from Bloomberg Economics.

Chance of Recession Within 12 Months

The probability model, which incorporates a variety of factors ranging from housing permits and consumer survey data to the gap between 10-year and 3-month Treasury yields, is now flashing a 38% probability of a recession over the next 12 months. That’s up from around 0% just a few months before.

“The risk of a self-fulfilling recession—and one that can happen as soon as early next year—is higher than before,” said Anna Wong, chief US economist at Bloomberg Economics. “Even though household and business balance sheets are strong, worries about the future could cause consumers to pull back, which in turn would lead businesses to hire and invest less.”

“The risk of a recession in early 2023 has risen substantially,” Wong said.

Recession odds are much higher for the end of next year. Previous estimates by Bloomberg Economics show the chance of a US recession by the start of 2024 is roughly three in four.

The Federal Reserve raised interest rates in June by 75 basis points, the most since 1994, and signaled further increases—potentially of a similar size—in the months ahead. That came on the heels of a 50 basis-point hike in the prior month and cemented a decisively aggressive pivot by the central bank.

The rapid run-up in borrowing costs, paired with tightening financial conditions and decades-high inflation, has heightened concerns that the Fed—in its attempt to cool the economy and therefore inflation—will ultimately tip the US economy into recession.

Recession Odds Rise

Probability of a US recession within 12 months

Source: Bloomberg Economics

The rise in recession odds in the latest month can largely be traced to two factors: a moderation in the corporate profit outlook and a significant deterioration in consumer sentiment.

Changing Picture

Selected key indicators from recession probability model

Note: ‘Expected change in business conditions’ is an index based to 100. ‘Conference board expectations’ shows the spread between the Present Situation Index and Expectations Index, both where 1985=100. Sources: University of Michigan; Conference Board; BEA

Financial conditions have tightened considerably in recent months, and corporate profit margins, while still robust, are set to soften somewhat in the second quarter of the year, according to Bloomberg Economics. In the wake of steep rate hikes by the Fed, businesses are contending with rising cost of capital.

Secondly, Americans’ views of future business conditions sharply deteriorated in June. Each month the University of Michigan releases a closely watched survey of consumer sentiment. The June report not only showed a collapse in consumer sentiment to a record low but also a big decline in a gauge of the expected change in business conditions in a year. At 76, that figure is now at one of its lowest readings in records back to 1978.

Decades-high inflation has particularly weighed on consumer confidence. Americans are facing near-record prices at the pump and ballooning bills at the grocery store. Adjusted for inflation, average hourly earnings have fallen for eight straight months, eroding Americans’ purchasing power and souring their views on the economy. The savings rate is near its lowest level since 2009, and more than half of Americans believe the US is already in recession.

A recession is certainly not inevitable, but the path to a so-called soft landing—a cooling in economic activity that doesn’t lead to a recession—is becoming increasingly narrow. That may require price growth to slow sharply and would likely be accompanied by a slight rise in unemployment. The Fed is hopeful of such a result, but Chair Jerome Powell has acknowledged achieving it will be “very challenging.”

Should a downturn begin in the next year or two, the pandemic recovery—which began in May 2020, according to the National Bureau of Economic Research—would be the shortest US expansion since the one in 1981-1982, which lasted just 12 months.

Bloomberg Economics’ year-ahead recession probability model will be updated monthly.

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