The US economy is edging precariously close to a recession, and it’s flashed a handful of warning signs in just the last week that suggest a downturn is on the horizon, according to Société Générale.
The European bank has warned of a recession to hit the US over the last year, despite many investors and economists remaining bullish on a soft-landing.
According to the bank’s chief global strategist, Albert Edwards, stocks and the economy have flashed a number of red flags, with three worrying data points appearing over the past week.
“Even if Armageddon looms, I guarantee the investment air will be filled with the sound of bulls singing their soft-landing siren songs,” Edwards said in a recent note to clients.
He pointed to three signs the economy is nearing a downturn.
1. Economic growth expectations have been cut
Atlanta Fed economists cut their expectations for second quarter GDP growth in half over the last week, down from 3.4% to 1.8% growth.
“US growth expectations have crashed in the wake of recent weaker-than-expected data,” Edwards said.”As GDP growth disintegrates, equity investors should be worried … that recession might yet arrive after all.”
2. Manufacturing activity has slowed
Manufacturing activity, a “key indicator” of economic growth, is also slowing, Edwards said. New manufacturing orders contracted in May, and overall manufacturing activity contracted for the 18th time over the last 18 months, according to the Institute for Supply Management.
“Although many may dismiss the importance of the manufacturing sector for the overall economy, it is undeniable that overall GDP ebbs and flows closely with it. No surprise then that fear of recession is resurfacing,” Edwards wrote.
3. Inflation measures are falling
Inflation has cooled from its highs in 2022. The market-based core personal consumption expenditures deflator — which is the Fed’s preferred measure of inflation, minus sectors like finance and insurance services — is in steep decline, clocking in at 2.8% for April. That’s a strong sign consumer spending — the key driver of the economy in recent years — is weakening.
A long retail spending spree since the waning days of the pandemic helped spur growth to surprising levels, topping out at almost 5% in the third quarter of 2023, but growth has tumbled since, coming in at 1.3% for the first quarter, according to the latest revision.
“That ‘revenge spending’ has now abated,” Edwards said.
The Fed has been walking this tightrope between lowering inflation and keeping growth from falling off for two years. While some argue that it’s still on track to achieve the soft landing, others aren’t so sure.
SocGen isn’t alone in sounding the alarm, and other economists say that high interest rates are finally working their way through the economy and depressing growth.
New York Fed economists see a 52% chance the economy could slip into recession within the next 12 months.
