As geopolitical tensions escalate in the Middle East, the debate over whether the U.S. economy is heading for a recession is gaining momentum in 2023.
Heightened geopolitical risks, persistent inflationary pressures, rising bond yields, and the Federal Reserve’s commitment to a prolonged period of higher interest rates have business leaders cautiously bracing for a contraction.
Speaking to Yahoo Finance Live, KPMG U.S. CEO Paul Knopp emphasized the prevalent uncertainty, stating, “There’s a lot of fog on the horizon,” with geopolitical tensions ranking high among the chief risks to the economy.
According to a survey by The Conference Board, 72% of CEOs are actively preparing for a potential U.S. recession within the next 12-18 months. Although this marks an improvement compared to the start of the year, the short-term economic outlook has taken a darker turn.
Notably, CEOs from major banks have also weighed in on the increasingly uncertain economic landscape. JPMorgan Chase CEO Jamie Dimon expressed concerns over various potential risks, including geopolitical crises abroad.
Citigroup CEO Jane Fraser, in the bank’s recent earnings release, pointed to “an increasingly cautious consumer.”
A trend of reduced consumer spending has been emerging, with Constellation Brands CEO Bill Newlands noting that shoppers are becoming more discerning in their purchases and spending less.
This shift is concerning because the resilient consumer base has played a significant role in defying recession predictions throughout the year, as consumer spending constitutes almost 70% of the U.S. GDP.
Recent sentiment data, however, is less optimistic, with consumer sentiment taking a significant hit in October, reaching its lowest level in five months, largely driven by households anticipating higher inflation in the coming year.
Persistent inflation poses not only a challenge for consumers but also for the Federal Reserve. Recent data from the Bureau of Labor Statistics revealed that prices remained stable at 3.7% in September, well above the Fed’s target of 2%.
Oxford Economics’ lead U.S. economist, Michael Pearce, warned that the Fed’s commitment to returning inflation to its long-term target could raise the likelihood of interest rate hikes this year, extend the period of restrictive monetary policy, and heighten the risk of a future recession.
In conclusion, the probability of a recession remains uncertain, but the economic outlook is undoubtedly clouded by a sense of ambiguity.
Liz Young, Head of Investment Strategy at Sofi, summed it up well: “We are not out of the woods just yet. It could still get worse before it gets better.”
(Source: Yahoo Finance)
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