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There are 2 things that could go wrong for the US economy and spark a recession, Morgan Stanley says

  • There are two things that could go wrong in the economy that could lead to a recession, Morgan Stanley said.
  • The bank pointed to risks stemming from the job market and potential US tariffs.
  • If layoffs surge and tariffs are implemented, GDP could drop as much as a 1.5 percentage points, it estimated.

The US economy appears on track to keep growing, but there are two things that could spoil the no-recession forecast on Wall Street, according to Morgan Stanley.

In a recent podcast, the bank pointed to lingering risks looming over the economy, even amid resilient growth and robust hiring this year.

For one, layoffs could surge, and the threat of more tariffs after the presidential election remains high. According to Seth Carpenter, the bank's global chief economist, those two factors could put the US on a path to a hard landing.

Carpenter highlighted risks in the job market, with most companies having filled open positions after dealing with a shortage of workers during the pandemic. Total job openings in the US clocked in around 8 million in August — down 34% from their peak in March 2022, according to the Bureau of Labor Statistics.

Should the economy slow for any reason — such as because of the cumulative impact of rate hikes since 2022 — employers are more likely than they were a year ago to lay off employees, Carpenter said.

"And that's usually what contributes to a recession. A slowdown, then people get laid off, laid off people spend less, the economy slows down more, and it snowballs," he added. "And so, if we do get a big slowdown for some reason, maybe there's more risk than there was, say, a year ago."

US companies have announced plans to cut 609,242 jobs from the start of the year through September, up 0.8% from job cuts announced in the same period last year, according to an analysis from Challenger, Gray & Christmas.

Another weakness that could push the US into recession stems from possible tariffs after the presidential election, with Trump vowing to impose 10% tariff on nearly all imported goods, and a 60% tariff on imported Chinese goods.

Experts have said those measures are inflationary and could raise prices for consumers, potentially leading people to spend less and sparking a slowdown, Carpenter speculated.

Tariffs could also result in higher prices for goods that producers need in industries like manufacturing. That could lead companies to produce less or invest less in production, another thing that could influence a slowdown.

If Trump implements the 10% universal tariff and the 60% tariff on Chinese goods at the same time, that could cause inflation to tick up 0.9 percentage points, per Morgan Stanley's projections. Meanwhile, GDP could fall as much as 1.5 percentage points, the equivalent of third-quarter GDP growth being slashed in half.

"So that's another place where I think we could be wrong," Carpenter said of his recession forecast, though he reiterated that a downturn wasn't his baseline view. "It could be a big hit to the economy, but that's one place where there's just lots of uncertainty, so we have to flag it as a risk to our clients."

The US economic outlook has brightened in recent months, and most forecasters on Wall Street are growing more confident about the prospect of a soft-landing or even a no-landing scenario, a situation where the economy continues to grow in a way that could reignite inflation.

As of September, the economy had a 57% chance of tipping into a downturn within the next 12 months, according to the latest projection from the New York Fed.

"We have been pretty constructive all along the whole hiking cycle. In fact, we've been calling for a soft landing. And if anything, where we were wrong with our forecast so far is that things have turned out even better than we dare hoped," Carpenter added.

Read the original article on Business Insider

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