The US Recession: Postponed but Not Prevented


Last updated: June 27, 2024

man_holds_empty_walletMany analysts have abandoned the idea of a US recession this year, a stark shift from last year when almost everyone predicted an economic downturn.

This was after the Fed embarked on one of the fastest rate hikes in history, increasing US interest rates by 550 basis points in a single go.

A recession seemed almost certain to the naive observer. In March 2023, the financial system wobbled as nearly all US regional banks faltered.

Yet, the Fed intervened, injecting trillions in liquidity behind the scenes while maintaining a facade of quantitative tightening.

Add to this the massive US fiscal spending. President Biden pumped trillions into the economy, spurring employment and demand and causing supply chains to choke. China’s debt burden has inadvertently helped ease the Fed’s inflation woes by exporting deflationary goods.

Without this slowdown in China, US inflation wouldn’t have dropped as quickly.

Today, the Consumer Price Index (CPI) is down to 3.5% year-over-year but remains stubborn at this level due to strong services and weak manufacturing. We’re still far from the Fed’s 2% target.

All this excess liquidity has merely masked underlying weaknesses, not postponed them. Fifteen months later, US economic data is rapidly slowing. Indicators like housing starts, multi-family unit construction, ISM, and jobless claims all show a marked slowdown.

This has caused US bonds to rally, even as the Congressional Budget Office projects a higher deficit estimate of $450 billion.

More debt is to be issued at a time when there are fewer buyers, but US bonds still offer a safe haven amidst global economic uncertainty.

There’s another concern. Many banks have been sitting on marked-to-market losses since last year’s aggressive rate hikes, which disrupted their asset-liability matching.

They’re waiting for the Fed to cut rates so they can mitigate this risk, but it’s taking longer than expected.

The Fed may have underwritten them with the Bank Term Funding Program (BTFP), but it’s a different story in Japan. Japanese investors, who held $1.18 trillion in US government bonds as of March, are now selling.

Norinchukin Bank plans to sell $63 billion of its US and EU government bonds by March 2025, converting paper losses into realized ones. This move echoes the uncertainty of 2008 when banks were waiting for the first to blink.

How long can Treasury Secretary Yellen support the US bond market with 10-year yields dropping to 4.22% from highs of 4.75%? With current inflation near 3.5% and real GDP growth at 1.5%, a 5% yield seems fair.

Equities aren’t the economy, but looking at every segment—from the average US consumer’s outlook and sentiment—it feels like the US is already at the recession’s doorstep.

By the time the Fed realizes this, it might be too late. Given it’s an election year, they’ll likely try to inject more liquidity and cut rates. But will that be enough?

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About The Author

Co-Founder & Chief Editor
Jon Morgan, MBA, LLM, has over ten years of experience growing startups and currently serves as CEO and Editor-in-Chief of Venture Smarter. Educated at UC Davis and Harvard, he offers deeply informed guidance. Beyond work, he enjoys spending time with family, his poodle Sophie, and learning Spanish.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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