- UBS's recession probability model shows the US economy slowing the fastest in 60 years.
- Still, "it's not at all clear" the country is heading toward a recession, the bank's economists said.
- The team views a recession in the next 12 months as unlikely as consumer spending holds strong.
The US economy is dramatically decelerating, but it can still avoid a recession, UBS economists said Wednesday.
The lightning-fast rebound from the COVID recession is over. Americans are starting to spend less as inflation climbs to 41-year highs. Hiring, while still strong, is slowing month by month. Forecasts for second-quarter gross domestic product suggest the economy grew at an anemic pace or even shrank again in the second quarter, burdened by supply-chain snags and waning demand.
The speed of the slowdown is "pretty spectacular," Arend Kapteyn, global head of economics and strategy research at UBS Investment Bank, said in a call with reporters. The economic data the bank tracks for its recession probability model signals the US is experiencing the fastest slowdown in 60 years. Still, "it's not at all clear" the deceleration will result in a recession, Kapteyn said.
"There's still a big buffer. We had a big slowdown, but in level terms … we're not yet in a recessionary environment," he said.
UBS pegs the odds of a US recession in the next 12 months at 40%, Jonathan Pingle, the firm's chief US economist, later said. That's roughly in line with other banks' estimates. Wall Street generally expects the US to dodge a downturn in the next year, with major banks arguing the labor market's strength and still-healthy demand will buoy the economy as it cools down.
No recession today — but one could soon emerge
Two major risks could still plunge the country into a recession, according to UBS. Consumer spending has so far outpaced inflation even as high prices have chipped away at Americans' disposable income in recent months. That's created a "wedge" between income and spending that's "historically quite rare," Kapteyn said. Excess savings, stimulus, and pent-up demand for services built up that buffer, and it's helped counter some of the economic slowdown.
Yet that wedge "isn't necessarily going to be there forever," Kapteyn said. The bank sees the gap between income and spending shrinking over the next few quarters, and if inflation doesn't cool, that convergence could pull the country into an economic slump.
"It's a bit of a race against the clock," Kapteyn said. "If inflation comes down, real disposable income goes back into positive territory and then consumption stays positive and you don't have a recession. Conversely, if inflation doesn't come down quickly, then consumption could converge on negative real income growth and then you have a consumer-led recession."
Should a consumer-led downturn emerge, it should still make for a "relatively mild recession" akin to the downturn in 2001, with two quarters of economic contraction and a two-percentage-point uptick in unemployment, Pingle said.
The worse of the two downturn scenarios would emerge if prices keep surging and the Federal Reserve has to ramp up its fight against inflation. The Fed raised interest rates at three times its typical pace in June, aiming to ease demand and put downward pressure on inflation. Yet the latest report showed price growth accelerating again last month.
If the Fed has to tighten policy even faster, the US will likely slide into a longer and deeper downturn, Pingle said. UBS expects a Fed-led recession to last about one year and look more like the downturn of the early 1990s.
The more severe scenario would yield a more harmful recession, but relief on the inflation front would likely come fast. When simulating how a downturn would play out, the bank sees job loss and slack in the economy reversing much of the goods demand that's powered inflation higher. The immediate shock would be disinflationary, and once the economy recovers, it will probably find itself in a much more sustainable inflationary environment than it boasts today, Pingle said.
"Even though inflation might be starting from a high level ... you do see the impact on nominal wage growth and prices relatively quickly once employment starts declining," he added.