Wall Street’s great debate of 2023 — whether the U.S. economy is headed for a recession — is resurfacing amid escalating unrest in the Middle East.
Heightened geopolitical risk, along with unabating inflationary pressures, surging bond yields, and the Federal Reserve’s “higher for longer” vision, has business leaders bracing for a contraction.
“There’s a lot of fog on the horizon,” KPMG U.S. CEO Paul Knopp told Yahoo Finance Live, citing geopolitical tensions as one of the top risks to the economy.
72% of CEOs are preparing for a US recession over the next 12-18 months, according to The Conference Board’s survey of business leaders. While that’s an improvement from the start of the year, expectations about the short-term economic outlook have darkened.
Big bank CEOs are among those weighing in on a more uncertain economic outlook. JPMorgan Chase (JPM) CEO Jamie Dimon pointed to a number of potential risks, including a sober warning on geopolitical crises abroad. Citigroup (C) CEO Jane Fraser noted “an increasingly cautious consumer” in the bank’s earnings release Friday.
Fraser’s note of cracks beginning to form in consumer spending is something that’s been highlighted recently. Constellation Brands (STZ) CEO Bill Newlands told Yahoo Finance Live this week that shoppers are already “spending a little less” while being more “careful” about what they buy.
The reason this is problematic is because the resilient consumer has helped the U.S. economy defy recession predictions so far this year, as consumer spending accounts for nearly 70% of U.S. GDP.
And if you look at the recent sentiment data, it’s not too encouraging. Consumer sentiment plunged in October to its lowest level in five months, driven in large part by households expecting higher inflation next year.
And sticky inflation is not just an issue for consumers, but for the Fed too. The latest data from the Bureau of Labor Statistics showed prices held steady at 3.7% in September, well above the Fed’s goal of 2%.
“With the Fed committed to returning inflation back to its long-run target of 2%, this would raise the odds of rate increases this year, extend the duration of restrictive monetary policy, and increase the chances of a recession occurring down the road,” Oxford Economics lead US economist Michael Pearce wrote in a note to clients this week.
To sum it up: The probability of a recession is still anyone’s guess, but it’s safe to say the economic outlook remains murky. Sofi’s (SOFI) Head of Investment Strategy Liz Young put it perfectly: “We are not out of the woods just yet,” she told Yahoo Finance. “It could still get worse before it gets better.”
Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.
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