The U.S. economy is moving precariously close to a recession, and last week it issued a handful of warning signs suggesting a slowdown is on the horizon, according to Société Générale.
The European bank has warned of a recession will hit the United States over the past year, despite the fact that many investors and economists remain optimistic about a soft landing.
According to the bank's chief global strategist, Albert Edwards, stocks and the economy have triggered a number of red flags, with three worrying data points emerging over the past week.
“Even as Armageddon looms, I guarantee the investment air will be filled with the sound of bulls singing their siren songs of soft landings,” Edwards said in a recent note to clients.
He pointed to three signs that the economy is nearing a slowdown.
1. Expectations for economic growth have been reduced
Atlanta Fed economists cut their expectations for second-quarter GDP growth in half over the past week, from 3.4% to 1.8%.
“Expectations for U.S. growth have collapsed following recent weaker-than-expected data,” Edwards said. “As GDP growth disintegrates, stock investors should be concerned…that a recession may eventually arrive.”
2. Manufacturing activity has slowed
Manufacturing activity, a “key indicator” of economic growth, is also slowing, Edwards said. New manufacturing orders contracted in May and overall manufacturing activity contracted for the 18th time in the past 18 months, according to the Supply Management Institute.
“While many may downplay the importance of the manufacturing sector to the overall economy, it is undeniable that overall GDP fluctuates closely with it. It is therefore not surprising that fear of a recession is resurfacing,” wrote Edwards.
3. Inflation measures are falling
Inflation has slowed from its 2022 highs. The market-based core personal consumption expenditure deflator – which is the Fed's preferred measure of inflation, excluding sectors like services financial and insurance – is down sharply, standing at 2.8% for April. It's a strong sign that consumer spending – the main driver of the economy in recent years – is weakening.
A long retail spending spree since the final days of the pandemic helped propel growth to surprising levels, peaking at almost 5% in the third quarter of 2023but growth has since fallen, standing at 1.3% for the first quarter, according to the latest revision.
“This ‘revenge spending’ has now declined,” Edwards said.
For two years, the Fed has been walking a tightrope between lowering inflation and preventing growth. While some say the soft landing is still on track, others aren't so sure.
SocGen is not the only one to sound the alarm, and other economists say that high interest rates are finally impacting the economy and depressing growth.
New York Fed economists see a 52% chance the economy could fall into recession over the next 12 months.