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The Lowdown Hub

A US recession is on the tableNot the most likely outcome, but no mere tail risk either


Good morning. I’m tanned, rested and ready after a week of fishing. Before I left, it was pretty clear that the war in Ukraine would lead to a Russian depression and a European recession. On my return, however, the possibility of a US recession had been added to the menu of possibilities, as an unlikely, but not very unlikely outcome. Today Ethan and I have a look at what’s changed. As always we are keen to hear readers’ thoughts:

We need to talk about a US recession

Here is the outlook from our favourite Wall Street economist, Don Rissmiller of Strategas:

Our base case is a 2023 mid-cycle slowdown (50 per cent odds) as the private sector helps the Fed bring inflation under control (eg, bottlenecks ease). With the domestic labour market still solid, and JOLTS job openings elevated, it remains difficult to make a US recession our base case. Yet if the Fed overdoes tightening, growth would falter (35 per cent odds). An upside surprise case would involve productivity increasing and growth proving robust (15 per cent odds)

A roughly one-third chance of recession is what Goldman Sachs economists are looking at too:

While our baseline forecast assumes that further service sector reopening and spending from excess savings will keep real GDP growth positive in the coming quarters, uncertainty around the outlook is higher than normal, and we view the risks of a recession as broadly in line with the 20-35 per cent odds currently implied by models based on the slope of the yield curve

Probabilities that are high but not above 50 per cent are hard to think about. The temptation is to chuck a 35 per cent possibility into the unlikely bucket and forget it. But if it comes to pass, and you are not prepared, you have only yourself to blame.

What has changed, such that the possibility of a US recession is being taken seriously? Oil prices up 30 per cent in a bit over two weeks are likely the most important attention-focuser. Wheat and corn prices, up 17 per cent and 10 per cent respectively over the same period, don’t help much either. But rumblings of a slowdown extend beyond commodities.