Bloomberg’s Economic Models and the Fed’s Beige Book Forecast Recession

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According to Federal Reserve business contacts, consumers are beginning to protest price hikes.

According to a survey released by the Federal Reserve on Wednesday, companies in the United States are growing increasingly gloomy about the state of the Economy in light of high inflation and rising interest rates.

According to the Fed’s 12 regional reserve-bank districts, business contacts have expressed “increasing worries about deteriorating demand,” according to the most recent Beige Book, the central bank’s collection of economic anecdotes from across the nation.

The U.S. economy grew somewhat overall, although circumstances differed by district, with two districts seeing a loss and four flat recording activity. According to the Fed, increasing interest rates, inflation, and supply interruptions were to blame for the regions reporting decreased activity’s stalling or weak demand.

Businesses stated that until early October, pricing pressures remained high despite some cost rises easing. The survey observed “declines in commodity, gasoline, and freight costs.”

Reginald Chever, vice president and regional executive of the Federal Reserve Bank of Atlanta, stated in an interview that “from a price viewpoint, it’s still a mixed experience.” The Economy is softening, according to many of our contacts, but this differs by industry.

Manufacturers in the Minneapolis Fed’s manufacturing district said that recent supply-chain bottlenecks had diminished due to increased shipping container availability. Other companies, however, said that they were still having supply problems. In the St. Louis Fed district, a one-grain mill reported 48–50 week wait times for packaging supplies.

A major retailer that reported that product prices had been lower than earlier in the year was among the firms in the Cleveland Fed’s district that reported a reduction in input costs, which “was at its highest in more than two years.”

Businesses all around the country reported that customers were protesting price increases.

Customers questioning pricing rises, according to retailers and a restaurant in the Dallas Fed district, is a rising worry for them. In the area of the St. Louis Fed, several healthcare and food service companies indicated that they “were unable to pass on costs to consumers and instead decreased services or lowered profits.” However, several firms in the Kansas City Fed’s region claimed it was still simple to pass expenses to customers.

When measuring inflation, housing is one area that receives the most significant weight, but it’s also one of the hardest to assess. David Harrison of the WSJ explains how the shelter index is determined and why it may cloud the Fed’s view of inflation.

The Fed and the real estate industry’s regional districts reported decreased economic growth due to increased interest rates.

Consumers “had become leery of greater payments due to increasing interest rates and higher car prices,” according to auto dealers in the Cleveland Fed’s area.

To lower the rising inflation, the Fed has raised interest rates five times this year and is anticipated to hike its federal funds rate by another 0.75 percentage points at its meeting next month.

Many companies around the nation said that recruiting has lately become simpler. However, many still mentioned the labor market as tight and having a high turnover rate. A candidate who “had seven food or retail jobs in the prior ten months, yet had been promoted to supervisor in the previous two jobs,” according to one company in the Minneapolis Fed’s area, was noted.

According to a staffing agency in the Chicago Fed’s district, the demand from customers has considerably decreased, while other firms continue to report trouble filling open positions. To recruit workers, several firms in the Dallas Fed district claimed to have “rebranded unwanted positions.”

According to recent Bloomberg Economics model forecasts, the U.S. will experience a recession over the next 12 months, dealing with President Joe Biden’s economic message before the November midterm elections hit.

The 12-month projection of a downturn by October 2023 is at 100%, up from 65% for the same period in the previous update, according to the most recent recession probability models by Bloomberg economists Anna Wong and Eliza Winger.

To convince Americans that the Economy was strong during his administration, Biden has frequently stated that the U.S. will escape a recession and that any slowdown would be “extremely modest.” The prognosis will come as bad news to him.

However, the likelihood of a contraction increases due to tightening financial conditions, persistent inflation, and expectations that a hawkish Federal Reserve will continue hiking rates.

Compared to other predictions, the model is more confident of a recession. According to a second Bloomberg study of 42 analysts, the likelihood of a recession over the next 12 months has increased from 50% to 60%.

The projects are in stark contrast to Biden’s upbeat tone. The president has emphasized job creation as he runs for re-election in three weeks, hoping to help Democrats keep control of the House and Senate.

But in an election when the Economy is expected to be the main issue, inflation, which has been hovering at a four-decade high, has hurt Democrats’ chances.

The Bloomberg Economics model forecasts the likelihood of a downturn from one month to two years using 13 macroeconomic and financial factors.

While the model’s prediction of a recession within a year has reached 100%, the likelihood that one would occur sooner is also increasing. The model predicts that there will be a recession within 11 months, up from 30%, and that one will occur within ten months, up from 0% to 25%.

  • According to Bloomberg Economics, the weakening in the economic and financial indices utilized as model inputs caused the prognosis to worsen.

Reference

https://www.bloomberg.com/news/articles/2022-10-17/forecast-for-us-recession-within-year-hits-100-in-blow-to-biden

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