New York (CNN Business) — Persistent inflation and large interest rate hikes by the Federal Reserve will push the US economy into a mild 1990-style recession starting in the spring, Fitch Ratings warned on Tuesday.
In a report first obtained by CNN, Fitch cut its US growth forecasts for this year and next due to one of the most aggressive inflation-fighting campaigns in history by the Federal Reserve. US GDP is now expected to grow just 0.5% next year, versus 1.5% in the company’s June forecast.
According to Fitch, high inflation “will excessively reduce” household income next year, which will reduce consumer spending to the point of causing a decline in the second quarter of 2023.
The grim forecast adds to growing fears among investors, economists and businesspeople that the world’s largest economy is on the verge of a recession, just two and a half years after the last one.
The silver lining, however, is that the next recession may not be anywhere near as destructive as the last two big ones.
“The recession we expect in the US is quite mild,” say economists at Fitch Ratings.
Fitch: Consumers will cushion the blow
The credit rating firm maintains that the United States enters this difficult period from a position of strength, especially since consumers are not as indebted as in the past.
“U.S. household finances are much stronger now than they were in 2008, the banking system is healthier, and there are few signs of overbuilding in the housing market,” Fitch Ratings economists wrote.
The Great Recession, which began in late 2007, was the worst recession since the Great Depression and came close to causing the financial system to collapse. The covid recession, which began in early 2020, caused the unemployment rate to skyrocket to almost 15%.
By contrast, Fitch Ratings sees the unemployment rate rising from just 3.5% today to 5.2% in 2024. That translates into millions of jobs lost, but not as many as were lost. during the two previous recessions.
“Fitch Ratings expects a very strong consumer balance sheet and the strongest job market in decades to cushion the impact of a likely recession,” the report said.
Despite growing recession fears, the labor market remains very tight as the supply of workers does not match the demand for labor. Layoffs are rare, resignations and job offers are high.
Echoes of 1990
Fitch says the next recession will likely be “very similar” to the one that started in July 1990 and ended in March 1991.
There are intriguing similarities between today and the early 1990s.
Just like today, the 1990 recession came after the Federal Reserve rushed to fight inflation by rapidly raising interest rates.
Likewise, that recession was preceded by a war-fueled oil crisis. Back then, it was Iraq’s invasion of Kuwait that drove up gasoline and energy prices for Americans.
The current period of high energy prices is linked in large part to Russia’s invasion of Ukraine, a conflict that has also pushed up food prices.
The 1990-1991 recession helped to doom the political fortunes of then President George HW Bush.
In the 1992 White House race, Arkansas Governor Bill Clinton blamed Bush’s policies for the recession, and a Clinton strategist coined the phrase “It’s the economy, stupid,” highlighting the importance of that issue to the voters.
Inflation is still the biggest problem
The latest polls indicate that today’s voters are also intensely focused on the state of the economy. In a New York Times poll released Monday, 44% of likely voters said economic concerns are the most important issue facing the United States, far more so than any other issue.
Inflation remains the biggest cloud hanging over the US economy. The high cost of living is eroding the value of workers’ paychecks and souring consumer confidence. Persistent inflation has also caused the Federal Reserve to rein in the economy by slashing interest rates.
For this reason, economists in an independent survey by The Wall Street Journal put the possibility of a recession in the next 12 months at 63%, the highest level in more than two years.
JPMorgan Chase CEO Jamie Dimon told CNBC last week that a “very, very serious” combination of challenges is likely to spark a recession by the middle of next year.
Fitch Ratings said there is still a risk of a deeper recession than the one that began in 1990, in part because US companies have more debt relative to the size of the economy than they did 30 years ago. The report also cites the “highly uncertain” impact of the Federal Reserve’s efforts to shrink its $9 trillion balance sheet.
The biggest bright spot in the economy is the job market, where the unemployment rate is tied for the lowest level since 1969. However, Fed officials expect the jobless rate to rise in the coming quarters and Bank of America warns that the US economy will lose 175,000 jobs a month during the first quarter of next year.
Even White House officials admit a recession could follow.
President Joe Biden told CNN’s Jake Tapper last week that a “slight recession” is possible, though he doesn’t foresee it.
Transportation Secretary Pete Buttigieg told ABC News over the weekend that a recession is “possible, but not inevitable.”
Although the risks have clearly increased, a recession is not a foregone conclusion.
No one, not even the Federal Reserve, knows exactly how this will all play out. It is impossible to say what happens to a $23 trillion economy two years after a once-in-a-century pandemic and in the midst of a war in Europe. There is no playbook for this.