'Top American economist issues warning of alarmingly high recession risks'
U.S. Economy Faces Concerning Recession Risks, Says Moody's Analytics Chief
Mark Zandi, the chief economist at Moody's Analytics, has raised an alarm about the elevated risks of a potential U.S. recession. In a recent statement, Zandi revealed that a machine learning model developed by Moody's now estimates a 45% probability of a recession within the next 12 months.
Despite the probability remaining below the 50% threshold, it significantly points to economic strain and uncertainty. Zandi noted that under normal circumstances, the risk would be closer to 15% in a stable economy.
In a post on May 28, Zandi expressed his concern, stating, "Recession risks are uncomfortably high. Our newly developed machine learning model puts the probability of a recession starting in the next 12 months at 45%. It is good that the odds are less than even, but not that good."
The model takes several economic indicators into account and historically aligns with actual downturns when the estimated probability exceeds 50%. The latest data shows a sharp increase in risk, approaching the critical point.
The increased risk reflects growing economic headwinds, with recent trade tensions playing a significant role. Although trade tensions have eased slightly due to progress in U.S. trade negotiations with key partners, they continue to pose a significant threat to future economic growth.
On May 16, Moody's Ratings downgraded the U.S. government's credit outlook from "stable" to "negative," citing rising debt, widening deficits, and weakening governance. During the peak of trade tensions, recession risks for 2025 were estimated to exceed 60%, a view shared by institutions like JPMorgan.
Economist Steve Hanke has maintained that there's a 90% chance the U.S. could face a downturn, attributing this to the lingering effects of the Trump-era tariffs. However, specific details from him were not available in the cited results.
The increased recession risks primarily stem from the economic drag caused by heightened tariffs and trade conflicts, which act like a substantial tax increase on the economy. This tax-like burden, estimated to be around $430 billion or 1.4% of GDP, raised costs and dampened economic activity.
The ongoing trade conflict undermines business sentiment, negatively impacting sectors like manufacturing, transport, distribution, and agriculture first. This slowdown could then extend to consumer discretionary sectors, causing consumers to cut back on non-essential spending such as entertainment and leisure.
In addition to the trade-related challenges, a sluggish growth outlook, fading policy support, and a cautious Federal Reserve stance further increase the risk of a recession and create a challenging economic environment ahead.
Global growth is also weak, with China's growth forecast upgraded but remaining below potential, and the global economy expected to grow at a subdued 1.3% annual rate, nearly a full percentage point below trend. The Fed is expected to keep interest rates steady for a period, delaying any rate cuts until late 2025, which could prolong economic constraints.
Businesses might experience reduced activity due to the elevated risks of a potential U.S. recession, as indicated by Moody's Analytics' machine learning model predicting a 45% probability of a recession within the next 12 months. Such an economic downturn could significantly impact various sectors such as manufacturing, transport, distribution, and agriculture, potentially causing a ripple effect on consumer discretionary sectors like entertainment and leisure.
