Mentions of recession in the U.S., if Factset research is to be believed, peaked in Q2’22. At that time, 242 S&P 500 companies mentioned the word in their conference calls. In Q3, that number dropped to 179, but remains above previous years’ values (range 20-40). The excitement may seem to have subsided, but it’s more likely that managers have simply resigned themselves to the inevitable.
Many might mistakenly think that inflation has gone down, so the underlying risks to the economy are also going down. But that’s far from the case – we’ve done a post on this topic before. Inflation is going down as the economy cools. At the very least, an important bell of the coming recession is the massive layoffs.
The first wave was in the summer and the second wave began in the fall. In early November, Twitter announced that it was laying off 50% of its staff (Musk’s doing), Meta laid off 13% of its employees, Apple and Amazon just suspended hiring for now, and Microsoft is reporting about 1,000 layoffs. And that’s just FAANG the biggest corporations on the market.
Companies went overboard with projections last year and hired too many employees. Now forecasts are being revised and spending is being cut. According to JPMorgan, the U.S. economy could lose a total of about 1 million jobs as a result of the recession. So, the worst is ahead.
What will happen to the rate?
Fed has historically acted somewhat late. At least because economic data on the effects of one action or another comes with a time lag. We won’t see the results of recent rate hikes until the end of the year, if not later. There is a chance that the recession will begin after the rate hike is over. In other words, we can assume that the peak of the economic problems will fall precisely at the time of the beginning of policy easing. JPMorgan expects it to happen in 2023.
By the end of the year, according to the forecast, the rate may be lowered to 3.5%. It is likely that the first quarter or half of the year it will be kept at a high level, and we will see the decline of the U.S. economy. It all depends on what values the regulator decides to raise it and how long they will hold it. The latest statements from Fed members make it clear that the peak will be at 5%.
“There is still a lot of work to be done on tightening,” as the regulators said. For the markets, early 2023 will be the worst period, as balance sheet tightening continues along with the recession. That’s when we’ll see a new bottom in the indices.
But there is a chance that the recession will either be mild or avoided altogether. In that case, the bottom for the market will coincide with the announcement of the Fed about the beginning of rate cuts. Everything will be decided in the first half of 2023. It will be clear whether there will be a recession in the U.S.