It is inevitable that the U.S. Economy will enter recession this year should the Fed continue to tighten monetary policy as inflation persists. Wall Street is already seeing slowed activity with some M&A deals and credit pricings put on hold indefinitely or cancelled outright. The real economy will feel the negative effects of higher interest rates immediately (Yields have been moving higher for well over a year). We disagree with Fed Chair Powell’s recent comments that he does not see risk of recession on the horizon.
Last week the Fed raised its overnight rate by 25 basis points making it more expensive for banks to borrow from the Fed. Even the smallest of incremental interest rate increases such as this has a tightening effect that will cascade across the real economy (although these modest rate increases will do little to cool inflation). Interest rates for mortgages, auto loans and other financings will rise as fixed income yields continue to march higher.
- Existing home sales slowed 7.2% in February, not an unexpected outcome as the interest expense on a like-for-like mortgage is now modestly higher.
- Commercial and Industrial loan activity has plateaued (see first chart below).
- Consumer sentiment is less positive (see second chart below).
- Numerous companies spoke of higher costs on the December quarter earnings calls. Those costs include higher wages and other input costs. Companies will pull back on investments to a degree as a result of higher expenses.
- Advanced Retail Sales activity has plateaued (see third chart below).
Our expectation is that similar reports of slower economic activity will follow from different sectors of the U.S. Economy for the remainder of 2022 and into 2023.
In addition, the Fixed Income market is suggesting slowed economic activity / recession on the horizon as the yield curve flattens (fourth chart below) as the 3-year yield (2.15), was a speck higher than the 10-year yield (2.14), as of March 18th.
Consumer Sentiment (Source: University of Michigan, FRED)