- In a rare admission, the Federal Reserve stated that a recession is likely in 2023
- A recession forecast is supported by several strong economic indicators
- Stocks will most likely fall further before they hit a bottom
Already stressed by banking turmoil, markets are dropping as the latest economic indicators point to a recession. In a rare admission, the federal government stated that we could be facing a downturn. The Federal Open Market Committee (FOMC) makes key decisions about interest rates and the growth of the United States money supply. They expect a recession before the end of 2023 based on several factors.
The FOMC isn’t alone in their prediction. The New York Fed’s Recession Probabilities Model suggests the odds of a downturn are at their highest since 1982. The model’s April reading shows a 57.7% chance of a recession. Their forecast matches private sector predictions. JP Morgan Chase says the chance of a US recession is greater than 50% before the end 2023.1
Debt Ceiling – The deadline to raise the debt ceiling is rapidly approaching. Weak tax receipts may cause the Treasury to be unable to pay all the US obligations earlier than expected. If the debt ceiling isn’t lifted, an unprecedented default would result in a government shutdown and risk triggering a deep recession.2
Leading Economic Index – The Conference Board is a research organization. It counts over 1,000 public and private corporations and other organizations as members. Their Leading Economic Index (LEI) broadly tracks business cycles using 10 inputs from across areas such as manufacturing, unemployment, and interest rate spreads. The LEI saws its sharpest reversal on record outside of a recession dating back to the 1950s. Wells Fargo economists said it presents a “clear message” that a downturn remains ahead.3
Bond Yield Inversion – An inversion is when short-term Treasuries pay more than long-term Treasuries. It typically occurs when investors lose confidence in the economy. An inversion has preceded every recession since 1955. Today’s yield curve is more steeply inverted than it has been at any other point since 1960. A recession typically occurs about one year after an inversion. The curve first inverted in March 2022, which means we are due for a recession soon.4
Shrinking M2 Money Supply – The M2 money supply is a measure for how much cash is circulating throughout the national economy. It tumbled from this time last year.
Steve Hanke is a Professor of Applied Economics at Johns Hopkins University. He thinks “a U.S. recession is baked in the cake.” And said, “Due to the Fed’s monetary mismanagement, the M2 money supply is falling at its fastest rate since the 1930s. The quantity theory of money tells us that, with a 6–18-month lag after M2 drops, economic activity will slump.”5
Some government officials did push back on the idea that we are entering a recession. Treasury Secretary Yellen said the US economy will avert of downturn. However, her prediction track record isn’t exactly perfect. Last year, Yellen had said there would only be a “small risk” of inflation, and that it would be “manageable.” To which she recently commented, “Well, look, I think I was wrong then about the path that inflation would take.”6
What It Can Mean
Since 1948, bear markets have started before the onset of a recession. The National Bureau of Economic Research has yet to officially declare a recession. Therefore, the S&P 500 could reach new lows in the near term. No bear market in the last 75 years has reached its bottom before the beginning of a recession.
Billionaire GMO cofounder Jeremy Grantham said, “This one is pretty damn big. It’s bigger than 2000, because it includes real estate and bonds, and that one did not. The economy had a gentle recession. It had no problem with real estate. It had no problem with markdown of debt. And yet, the Nasdaq went down 82%, Amazon went down 92%, and the S&P went down 50%. Be advised, this is not a gentle setback like 2000.”7
Powerful signs are pointing towards a severe recession. People who are interested in protecting the value of their portfolios should investigate the benefits of precious metals. A Gold IRA from American Hartford Gold can safeguard your wealth through an extended economic downturn. Call us today at 800-462-0071 to learn more.