Leonardo Munoz/VIEWpress
Hopes for a soft landing in the economy could be dashed as a number of risks start to converge.Raymond James said the US entering a mild recession is the most likely outcome.These are four risks that could send the economy into a recession sooner rather than later, according to Raymond James.
The US economy is more likely to enter a mild recession than stick a soft landing, according to a Friday note from Raymond James.
Chief investment officer Larry Adam said the current cycle in the US economy is entering an inflection point as the fourth quarter of the year approaches.
That’s because a number of risks, which may seem small on their own, are all converging and could ultimately have a noticeable impact on the economy.
“While stronger than expected growth has bolstered hopes that the Federal Reserve can achieve a soft, non-recessionary-landing, we still think a mild recession is the more likely outcome,” Adam said.
These are the four risks that could ultimately tip the economy into a recession, according to Adam.
1. Labor market is weakening
“The labor market’s strength is finally starting to wane. First, the pace of job growth has slowed considerably, with the three-month moving average falling to its lowest level since 2019. Second, job openings are starting to fade, down over three million from the recent peak. Third, consumer expectations of the labor market are moderating, with the % of consumers stating that jobs are ‘hard to get’ climbing to its highest level since April 2021,” he said.
Adam also highlighted that a recent report suggested that seasonal hiring at retailers during the upcoming holidays could be the weakest since 2008.
2. Headwinds for the consumer are building
The resilience of consumer spending is likely to come to a halt as the labor market softens, pandemic-era excess savings are fully depleted, and student loan payments resume for the first time in three years, according to the note.
“With student loan payments set to resume on October 1 and gas prices rising as oil prices move higher, consumers should have less discretionary income to spend going forward. This has already started to spill over into weaker travel demand,” Adam said.
3. High borrowing rates reach a tipping point
“With mortgage, auto and credit card rates at multi-year highs, demand for loans from households has fallen dramatically. Banks are not only less willing to lend; the cost of borrowing has become prohibitive. For example, the average monthly payment on mortgages and auto loans is up over 70% since 2019! And with mortgage rates now well above 7.0% and house prices still elevated due to the inventory shortages, affordability is becoming a serious dilemma,” Adam said.
The housing market has a multiplier effect on the economy, as the purchase of a house typically includes big spending on appliances, home decor, and home improvements, among other categories. But with prospective buyers delaying their home purchase and existing homeowners “frozen” in their homes because of the current mortgage rate dynamic, that multiplier spending effect “is likely to dry up,” he added.
4. Chances of a government shutdown are rising
“What worries us this time around is the timing. In isolation, past government shutdowns have not been a major market moving event. However, if there is a government shutdown, at a time when growth headwinds are building and strike activity (e.g., United Auto Workers) is on the rise, the collective impact of all these forces could be more potent than what is expected,” Adam said.