- A recession is poised to hit the US economy within the next nine months, according to Raymond James.
- The investment firm said rising borrowing costs, a tapped out consumer, and ongoing labor strikes should push the economy into a recession.
- These are the three big warning signs Raymond James is monitoring ahead of a potential recession.
Don't be fooled by a resilient consumer, as a recession is poised to hit the US economy within the next nine months, according to a recent note from Raymond James chief investment officer Larry Adam.
Wall Street forecasts of a potential recession have been getting pushed further and further out into the future as consumers continue to show solid spending habits and are overall in good financial shape. But a convergence of several risk factors suggest to Adam that the economy will be unable to avoid a mild recession within the next year.
These are the three warning signs he is monitoring ahead of a potential recession.
1. Growing headwinds for consumers
From the resumption of student loan payments to elevated borrowing costs, there's a lot of risks that everyday consumers are forced to navigate. Tailwinds that drove strong consumer spending since the pandemic are ending and excess savings have been nearly depleted.
"Sure, consumers have jobs and income right now, but their ability to continue to consume indiscriminately is coming to an end," Adam said.
He pointed to recent comments from Bank of America CEO Brian Moynihan, who said consumer spending is now running at levels consistent with a low-inflation, low-growth economy that was prevalent before the pandemic.
Finally, growing credit card debt and rising delinquencies suggest more Americans are starting to fall behind on debt obligations.
"While we are not suggesting that consumption is going to fall off a cliff, a moderation in spending should be expected," Adam said.
2. High borrowing costs
High borrowing costs for cars, homes, and credit cards pose a threat to economic growth, especially if they persist for longer than expected.
The housing market's ongoing affordability crisis suggests residential real estate activity will stay "frozen," according to Adam, and that is weighing on homebuilder confidence, which has declined to its lowest level since January. Consumers are navigating this scenario by utilizing adjustable rate mortgages, which now make up a nearly 10% share of new home loans.
The higher interest rates are also impacting business capital expenditure plans.
"A composite of regional Fed capex surveys shows that business capex spending plans over the next six months have fallen to their second lowest level in the post-COVID era," Adam observed.
3. Macro risks are building
Risks surrounding the economy and the stock market are rising, and quickly. Elevated gas prices, conflicts in the Middle East, and souring consumer sentiment are just a few of the lingering threats.
The Conference Board's Expectations Index tumbled to its lowest level in four months, "a level that historically signals a recession within the next year," Adam observed. The index measures consumers' attitudes towards the short-term outlook for the economy and jobs market.
All of these risks should ultimately weigh on consumer spending habits as the crucial holiday season approaches.
"Add in the possible disruptions from the ongoing autoworkers strikes and a potential temporary federal government shutdown in mid-November, and growth could look considerably weaker in the months ahead," Adam said.