The economy has a ‘throat ache’ that ‘could get worse before it gets better,’ top economist warns

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Despite consistent recession predictions from billionaire investors, Wall Street analysts, and even former Federal Reserve officials for over a year now, the U.S. economy has proved to be incredibly resilient. The unemployment rate remains near record lows at 3.6%, and the Atlanta Fed estimates GDP grew 1.5% in the first quarter. But Gregory Daco, chief economist at EY-Parthenon, warned this week that a combination of factors in the wake of the recent banking crisis will “weigh on” the economy in the coming months.

“The economy is unwell. It’s not the flu, but it is a throat ache,” he wrote in a Wednesday research note. Citing stubborn inflation, high interest rates, and a reduction in the availability of loans for businesses and consumers, he added that “it could get worse before it gets better” and his firm continues to project a midyear recession.

The key to Daco’s recession forecast is the ailing American consumer. Even in the face of four-decade-high inflation and rapid interest rate hikes, Americans have buoyed the economy with their spending over the past year. That’s critical, because spending alone represents nearly 70% of U.S. gross domestic product. But there’s been “significant cooling” in spending over recent weeks, Daco said, and he believes that will continue throughout the year. 

Retail sales slowed 0.4% month over month in February in a sign consumers are feeling the pinch of high prices. And Costco, which was a pillar of strength among retailers throughout the pandemic, revealed its first same-store sales decrease in over three years Wednesday. U.S. same-store sales dropped 1.5% in March, while e-commerce sales were down 12.7%.

Daco went on to warn that the historically tight labor market that has helped buoy the U.S. economy over the past few years may be cracking as well. “Our conversations with business executives indicate that hiring efforts have been scaled back notably across numerous sectors,” he wrote. And “business investment activity is softening,” he added, pointing to the latest ISM manufacturing survey index, which showed new orders, employment, and backlogs all contracting in the sector. 

Daco said he believes that by late summer, when the Federal Reserve meets for its annual central bank symposium at Jackson Hole, Wyo., “the economy will already be in a recession,” and the job losses and even “potential adverse financial market ramifications” from that recession will lead central bankers to cut rates.

“As I’ve stressed before, even though we do not see evidence of broad-based economic imbalances, recessions are often non-linear psychological events,” he wrote, arguing economic downturns can play out slowly and unpredictably. But we will get a better idea if Daco’s theory about an “unwell” economy is right on Friday with the release of the latest jobs numbers from the Bureau of Labor Statistics.

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