Wall Street is increasingly convinced that the Federal Reserve is going to drag the economy into a recession with its war on inflation.
Bank of America, Deutsche Bank, Wells Fargo and Goldman Sachs are among the most notable firms forecasting the possibility of a downturn within the next two years, as the U.S. central bank moves to aggressively tighten monetary policy in order to cool consumer demand and bring inflation back down to its 2% target.
There are growing signs the banks may be right, although recessions are notoriously difficult to predict.
Here is a closer look at some signs the economy is beginning to splinter.
GDP unexpectedly shrank in the first quarter
Economic growth in the U.S. is already slowing.
The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since the spring of 2020, when the economy was still deep in the throes of the COVID-induced recession.
ONE OF BIDEN’S FAVORITE ECONOMISTS SEES A HIGH CHANCE OF RECESSION IN NEXT 2 YEARS
GDP contracted by 1.4% on an annualized basis in the three-month period from January through March, according to the government’s first reading of the data. That was sharply below Refinitiv economists’ expectations for growth of 1.1%, and suggested that dark clouds are looming on the horizon.
“The shock drop in GDP is a wake-up call that the economy isn’t as strong as we all thought,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “It’s possible that GDP gets revised higher next month, as this is just the first release and there will be two revisions, but it is a warning sign.”
Recessions are technically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, falling income and slowing retail sales.