The US economy is teetering precariously close to a recession and has shown a number of warning signs in just the past week that suggest a downturn is on the horizon, according to Société Générale.
The European Bank has warned of a recession hitting the US over the past year, despite many investors and economists remaining bullish on a soft landing.
According to the bank’s head of global strategy, Albert Edwards, stocks and the economy have raised a number of red flags, with three worrying data points emerging over the past week.
“Even if Armageddon approaches, 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 that the economy is heading for a downturn.
1. Expectations for economic growth have decreased
Atlanta Fed economists cut their second-quarter GDP growth expectations in half last week, from 3.4% to 1.8% growth.
“U.S. growth expectations have tumbled after the latest weaker-than-expected data,” Edwards said “As GDP growth unravels, equity investors should be concerned … that ultimately recession may yet arrive.”
2. The productive activity has slowed down
Manufacturing activity, a “key indicator” of economic growth, is also slowing, Edwards said. New manufacturing orders fell in May and overall manufacturing activity shrank for the 18th time in the past 18 months, according to the Institute for Supply Management.
“While many may dismiss the importance of the manufacturing sector to the overall economy, it is undeniable that overall GDP ebbs and flows closely with it. No wonder recession fears are re-emerging,” Edwards wrote.
3. Inflation measures are decreasing
Inflation has cooled from its highest levels in 2022. The market-based core personal consumption expenditure deflator – which is the Fed’s preferred measure of inflation, minus sectors such as financials and insurance services – is falling large, reaching 2.8% for the month of April. This is a strong sign that consumer spending – the main driver of the economy in recent years – is weakening.
According to the latest review.
“That ‘revenge spending’ has now been reduced,” Edwards said.
The Fed has been walking this tightrope between lowering inflation and keeping growth from falling for two years. While some argue that it is still on track to reach the soft landing, others are not so sure.
SocGen is not alone in sounding the alarm, and other economists say high interest rates are finally creeping into the economy and depressing growth.
New York Fed economists see a 52% chance the economy will slip into recession within the next 12 months.
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