Experts say U.S. could be heading toward recession

The U.S. economy could be heading for a recession in the next year, according to growing warnings from banks and economists, as a sudden bout of economic pessimism hammers financial markets that had been counting on sustained economic momentum.

Although major swaths of the economy — including the job market and consumer spending — remain robust, there are mounting worries that rising borrowing costs for consumers and businesses, after years of near-zero interest rates, could cause a sudden retrenchment. The Federal Reserve has raised interest rates by 0.75 percentage points so far this year, while officials are signaling more aggressive increases could be necessary to cool the economy. Continued uncertainty from the coronavirus pandemic and Russia’s invasion of Ukraine are adding to the uneasiness.

“Recession risks are high — uncomfortably high — and rising,” said Mark Zandi, chief economist at Moody’s Analytics. “For the economy to navigate through without suffering a downturn, we need some very deft policymaking from the Fed and a bit of luck.”

This week alone, former Goldman Sachs chief executive Lloyd Blankfein warned of a “very, very high risk” of recession; Wells Fargo CEO Charlie Scharf said there was “no question” that the U.S. economy is heading toward a downturn; and former Fed chairman Ben Bernanke cautioned that the country could be poised for “stagflation” — a slowing economy combined with high inflation.

Those concerns come amid a smattering of data that points to economic cooling, particularly in interest-rate-sensitive sectors that are already feeling the brunt of the Fed’s promise to keep tightening monetary conditions. New home construction slowed in April. Mortgage demand continues to decline.

Some of the country’s largest and most influential retailers reported disappointing sales and profits this week because of higher costs and overstocked inventory issues, engineered to avoid supply chain disruptions, setting off a stock market meltdown. Walmart stock plunged more than 11 percent on Tuesday, its worst one-day loss in 35 years. On Wednesday, Target shares tumbled 26 percent, following a stunning 52 percent drop in quarterly profits, which executives attributed in part to cooling demand for big-ticket items such as TVs, kitchen appliances and outdoor furniture.

“While we anticipated a post-stimulus slowdown in these categories … we didn’t anticipate the magnitude of that shift,” Brian Cornell, Target’s chief executive, said in a Wednesday earnings call. “When we talk to our guests, they often express their concerns about a host of rapidly changing conditions, ranging from geopolitics to the high and persistent inflation they’ve been experiencing.”

Goldman Sachs this week revised down its forecast for second-quarter U.S. economic growth, to 2.5 percent, citing higher prices and continued supply chain disruptions. That follows an unexpected contraction in the first three months of 2022, when the economy shrank 1.4 percent, mostly because of a trade imbalance and a drop in inventory purchases.

International turmoil, including a risk of recession in Europe and China, is dimming the outlook for the U.S. economy. And a strengthening U.S. dollar — as rate increases make dollar investments more attractive — could dampen exports, raising the chances of a technical recession in which the economy contracts for two quarters in a row.

That fear of a souring economy as well as shifts in consumer pandemic spending habits have led some highflying tech darlings including Netflix and Peloton to announce layoffs in recent weeks. Twitter and Meta have paused hiring plans, while Amazon executives recently said the company was “overstaffed” after months of brisk hiring. National claims for unemployment insurance inched up to 218,000 last week, a four-month high although still near historic lows.

Meanwhile, inflation, which remains near 40-year highs, has become a central challenge for both the economy and the Biden administration. Higher prices for basics like food, energy and housing are straining Americans’ budgets and clouding their view of the economy.