Bloomberg economists see a "better-than-even" chance of recession this year

There's a greater than 50% chance of a recession starting in the U.S. before the end of 2023, according to Bloomberg's research arm, Bloomberg Economics.

Despite mounting "soft landing" calls, Bloomberg economists Anna Wong and Tom Orlik say a recession remains their model's base case scenario for this year.

"When everyone expects a soft landing, brace for impact. That’s the lesson of recent economic history—and it’s an uncomfortable one for the U.S. right now," they wrote.

The Bloomberg Economics model uses over a dozen financial indicators like jobs or consumer spending to predict the odds of a recession. It also aligns with the National Bureau of Economic Research's (NBER) definition of when a recession actually begins.

Economic ripples of high fuel costs

One of the critical factors contributing to the model's recessionary warning is the surge in gas prices.

The cost of gasoline has been steadily rising, placing a significant burden on consumers and affecting their daily commute costs, travel plans, and household budgets.

High gas prices have a cascading effect on the broader economy. They can lead to increased production costs for businesses, which may then be passed on to consumers in the form of higher prices for goods and services.

This inflationary pressure can erode consumers' purchasing power and hinder economic growth.

“Energy prices are very important for the consumer. This can affect consumer spending. It certainly can affect consumer sentiment,” said Fed chairman Jerome Powell after announcing a rate pause in September. “It really comes down to how persistent, how sustained these energy prices are.”

Moreover, the surge in gas prices can also impact transportation-dependent industries, such as logistics and manufacturing, potentially leading to job losses and reduced economic activity.

Impending loan payments

Another concerning factor is the imminent restart of student loan payments. As of Oct. 1, approximately 43 million Americans are set to resume making payments on their student loans.

This marks a significant financial challenge for many who have been granted temporary relief from these obligations since 2020 due to Covid.

Mark Zandi, chief economist at Moody’s Analytics, told the Washington Post, “The increase in delinquencies and defaults is symptomatic of the tough decisions that these households are having to make right now—whether to pay their credit card bills, their rent or buy groceries.”

The resumption of student loan payments places a direct financial burden on borrowers, potentially reducing their disposable income and limiting their ability to spend on other goods and services.

It also has the potential to dampen consumer confidence because those with student loans may feel less secure about their financial well-being.

This may have already started, according to the University of Michigan’s Consumer Sentiment Index, which declined in the summer ahead of the loan repayment schedule.

“The Michigan survey puts a large weight on perceptions of personal finances, which are likely to take a hit when repayments on student loan debts restart in October,” said Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics.

Additional factors weighing on the economy

Other economic factors are contributing to the sense of fragility in the U.S. economy, including rising insurance premiums for healthcare, home insurance, and auto insurance.

Additionally, U.S. personal savings, which surged during the pandemic, are now declining. Excess savings could run out as early as this quarter, as reported by the San Francisco Fed.

Economists also fear that a potential government shutdown could disrupt the lives of millions of government workers and potentially tip the economy into recession.

A shutdown will “further dent business and consumer confidence at a time when a confluence of risks threatens to drive growth in the final quarter of the year well below 1% and conceivably result in a net decline in growth,” said Joe Brusuelas, chief U.S. economist at RSM.