High inflation and rising interest rates are slamming the brakes on U.S. growth, economists say, but there’s still a narrow chance to avoid a second recession in three years. The outlook is not looking good, to be sure.
The economy shrank in the first quarter for the first time since the onset of the pandemic. The U.S. is also on track to expand less than 1% in the spring based on the latest Wall Street estimates, putting it dangerously close to recession territory. A recession it typically seen as two consecutive quarters of declining growth. The most recent batch of economic signposts haven’t given much reason for optimism, either. The housing market has stalled due to soaring mortgage rates. Retail sales fell in May for the first time in five months. The number of people applying for unemployment benefits rose in June to a five-month high. And surveys of consumers and business leaders show grave worries about the rest of the year. All the bad news helped drive the Dow Jones Industrial Average
below 30,000 for the first time in 17 months this week. “A slowdown has already begun,” said Bill Adams, chief economist at Comerica Bank in Dallas. The Federal Reserve on Wednesday acknowledged the fresh challenges faced by the economy, chopping its estimate of U.S. growth this year to just 1.7% from 2.8%. Last year the economy expanded at a frothy 5.7% pace. The Fed also downgraded its assessment of the economy after approving the biggest increase in interest rates in 28 years to try to lasso runaway U.S. inflation. The cost of living has surged 8.6% in the 12 months ended in May — the biggest increase in 40 years — and it’s likely to go even higher over the summer. Read: Fed Rate Hikes Will End Sooner Than You Think. What That Means for the Stock Market The central bank is poised to jack up a key short-term U.S. interest rate to 3.4% by year end. It had kept its benchmark rate near zero during the pandemic, a cheap-money strategy that helped the economy recover faster but also planted the seeds of high inflation. Rising interest rates are already throwing cold water on interest-sensitive parts of the economy such as housing. The cost of a 30-year fixed mortgage has leaped from 2.75% last fall to more than 6% this month, freezing out lots of buyers. That’s not all. Higher rates will make it more expensive to buy a car, rely on credit cards, take out a business loan or sell corporate bonds. “There are certainly a lot of challenges ahead,” said Sam Bullard, senior economist at Wells Fargo in Charlotte. N.C. “The …