As the US economy continues to bask in the glow of resilient consumer spending and Wall Street’s optimism, a warning has emerged from Raymond James’ Chief Investment Officer, Larry Adam.
In a recent note, Adam conveyed a sobering message: a recession could be looming on the horizon, poised to strike within the next nine months.
While the prevailing sentiment might lean towards economic prosperity, Adam believes converging several risk factors signals an impending storm.
Warning Signs of an Impending Recession in the US Economy
Here are three critical warning signs that he is monitoring closely.
1. Growing Headwinds for Consumers
The first ominous sign is the increasing headwinds faced by everyday consumers.
Since the pandemic, consumers have been a driving force behind the economic recovery, propelling the nation with their robust spending habits.
However, these tailwinds are subsiding, and excess savings have dwindled. From resuming student loan payments to elevated borrowing costs, consumers are navigating treacherous financial waters.
“Sure, consumers have jobs and income right now, but their ability to continue to consume indiscriminately is coming to an end,” warned Adam.
He cited Bank of America CEO Brian Moynihan’s remarks, indicating that consumer spending levels are consistent with a low-inflation, low-growth economy reminiscent of the pre-pandemic era. Additionally, the surge in credit card debt and rising delinquencies signal that more Americans are struggling to meet their debt obligations.
While Adam does not foresee consumption plummeting, he anticipates a moderation in spending. As the safety nets erode, consumers may become more cautious with their finances, which could have far-reaching economic implications.
2. High Borrowing Costs
The second warning sign pertains to the elevated borrowing costs for essentials such as cars, homes, and credit cards.
These high borrowing costs substantially threaten economic growth, especially if they persist for an extended period.
According to Adam, the affordability crisis in the housing market suggests that residential real estate activity is at risk of stagnation.
This, in turn, is impacting homebuilder confidence, which has dropped to its lowest level since January.
To cope with the rising costs, consumers are turning to adjustable-rate mortgages, which now account for nearly 10% of new home loans.
Furthermore, the spike in interest rates is also hampering business capital expenditure plans. A composite of regional Federal Reserve capital expenditure surveys reveals that business spending plans for the next six months have declined to their second-lowest level since the post-COVID era began.
3. Building Macro Risks
The third warning sign is the gathering of macroeconomic risks. These risks are multifaceted, ranging from elevated gas prices and conflicts in the Middle East to souring consumer sentiment.
Adam pointed to the Conference Board’s Expectations Index, which recently plunged to its lowest level in four months—a level historically indicative of an impending recession within the following year.
This index measures consumers’ attitudes toward the short-term economic outlook and the job market.
All these converging risks could significantly impact consumer spending habits, particularly as the critical holiday season approaches.
Additionally, the possibility of disruptions from ongoing autoworker strikes and a potential temporary federal government shutdown in mid-November loom, further threatening economic growth.
While the resilience of the US consumer has been a beacon of hope in recent times, Larry Adam’s warnings serve as a stark reminder that the economic horizon is not entirely free of storm clouds.
Vigilance, preparedness, and prudent financial management may be the keys to weathering what lies ahead.
As the economy teeters on the precipice, the nation watches, hoping the warning signs are heeded and potential disaster averted.