Fear of a recession could become a self-fulfilling prophecy

Fear of a recession could be the final straw that actually tips the economy into that recession, some analysts say.

Driving the news: Persistent inflation, and the Federal Reserve’s campaign to rein it in, are conspiring to tip the economy into a downturn — one that even Fed Chair Jerome Powell acknowledges could metastasize into a recession.

  • Wall Street, Main Street and Washington all have differing opinions about the likelihood of a recession and how deep it’s likely to be if it happens.
  • Wall Street economists have been gradually hiking their recession forecasts. Their estimates now put the likelihood of a recession somewhere between 30% and 50% — or, as veteran market analyst Peter Boockvar opined last week – a staggering 99%.

Between the lines: All the chatter about a slowdown is creating what could best be summed up in the lyrics of a 1987 hit by soul singer Keith Sweat: Something just isn’t right, and consumers have a gut feeling it’s not, even if jobs and spending remain robust.

  • Whether the odds of a recession are 30,40% or (*shudder*) 99%, fear can make itself into reality, if it impacts the public’s willingness to open their wallets in an economy overwhelmingly powered by consumer spending.

What they’re sayingIn an Instagram post, Ritholtz Wealth CEO “Downtown” Josh Brown recently argued that we may “talk ourselves into a recession,” given the sharp downturn in consumer psychology.

  • “If enough people believe it’s time to rein in their spending – and then act on that belief – it becomes a self-fulfilling prophecy,” he wrote.
  • Even if growth slows without becoming a recession “people instinctively know that something’s just not right,” Brown said – channeling his inner Keith Sweat.

Where it stands: Although consumer demand remains strong, cracks are starting to show up in the labor market: some tech companies are laying off employees and jobless claims are inching up from 50-year lows.

  • As Axios’ Courtenay Brown wrote recently, bond and commodity prices “are…tilting the narrative toward a more conventional recession in which inflation and growth fall in tandem.”

How it works: A recession is technically defined as 2 consecutive quarters of negative activity. For those who may have forgotten, we’ve already had one in Q1.

Yes, but: Not everyone thinks a recession is a foregone conclusion.

  • Capital Economics warned in a research note that economy jitters are “overdone,” because negative sentiment has yet to slow down consumption, among other factors.
Source: Axios

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