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First on CNN: Fitch says economy will enter a mild 1990-style recession next spring

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CNN Business

Fitch Ratings warned on Tuesday that stubborn inflation and the Federal Reserve’s massive rate hikes will plunge the American economy into a moderate 1990-style recession from the spring.

In a report first obtained by CNN, Fitch lowered its US growth forecasts for this year and next due to one of the Fed’s most aggressive anti-inflation campaigns in history. US GDP is now expected to grow only 0.5% next year, down from the 1.5% the firm had forecast for June.

Fitch said that by shrinking consumer spending enough to cause a drop in the second quarter of 2023, high inflation will prove “too much” in household income next year.

As one of the world’s three largest credit rating agencies, Fitch provides important guidance to investors by assessing the ability of companies and nations around the world to repay their debt.

The bleak forecast adds to the growing fear among investors, economists and business leaders that the world’s largest economy is on the brink of a recession – just 2.5 years after the last.

However, the silver lining is that the next recession may not be as devastating as the last two great recessions.

“The US recession we’re expecting is pretty mild,” Fitch Ratings economists said.

The credit rating agency argued that the United States is entering this difficult period from a strong position – especially since consumers are not burdened with as much debt as in the past.

“US household finances are now much stronger than in 2008, the banking system is healthier, and there is little evidence of over-construction in the housing market,” Fitch Ratings economists wrote.

The Great Recession, which began in late 2007, was the worst recession since the Great Depression and almost led to the collapse of the financial system. The Covid recession, which began in early 2020, has caused the unemployment rate to skyrocket to around 15%.

By contrast, Fitch Ratings thinks the unemployment rate has risen from just 3.5% today to 5.2% in 2024. That means millions of jobs lost, but not as many as those lost during the previous two recessions.

“Fitch Ratings expects a very strong consumer balance sheet and the strongest labor market in decades to soften the impact of a possible recession,” the report said.

Despite growing recession fears, the job market remains tight as the supply of workers is unable to meet the demand for labor. Layoffs are low, layoffs and job opportunities are high.

The next recession will likely be “substantially similar” to the one that began in July 1990 and ended in March 1991, Fitch said.

There are interesting similarities between today and the early 1990s.

Like today, the 1990 recession occurred after the Fed began tackling inflation by rapidly raising interest rates.

Likewise, a war-induced oil shock preceded this decline. At the time, it was Iraq’s invasion of Kuwait that drove up gasoline and energy prices for Americans.

Today’s era of high energy prices is largely linked to the Russian invasion of Ukraine, a conflict that also drives up food prices.

The 1990-1991 recession helped ruin the political fate of then-President George HW Bush.

In the 1992 White House race, Arkansas Governor Bill Clinton blamed Bush’s policies for the recession, and a Clinton strategist coined the phrase “The economy is stupid,” emphasizing the importance of the issue for voters.

Recent polls show that voters today are focusing heavily on the state of the economy. In a New York Times poll published Monday, 44% of prospective voters said economic concerns are the most important issue facing America – far higher than any other issue.

Inflation remains the biggest cloud over the US economy. The high cost of living is eroding the value of workers’ paychecks and undermining consumer confidence. Persistent inflation has also caused the Federal Reserve to raise interest rates dramatically, tightening the brakes on the economy.

That’s why, in a separate survey from The Wall Street Journal, economists pin the probability of a recession in the next 12 months at 63%, the highest in more than two years.

JPMorgan Chase CEO Jamie Dimon told CNBC last week that a “very, very serious” mix of challenges is likely to lead to a recession in the middle of next year.

Fitch Ratings said there is still a risk of a deeper recession than it started in 1990, in part because US companies carry more debt relative to the size of the economy than they did 30 years ago. The report also referred to the “extremely uncertain” impact of the Fed’s efforts to shrink its $9 trillion balance sheet.

The biggest bright spot in the economy is the job market, with the unemployment rate tied to its lowest level since 1969. But Fed officials expect the unemployment rate to rise in the coming quarters, and Bank of America warns the US economy will lose. 175,000 jobs per month in the first quarter of next year.

Even White House officials admit there may be a setback to the cards.

President Joe Biden told CNN’s Jake Tapper last week that there might be “a mild recession,” though he didn’t anticipate it.

Transport Minister Pete Buttigieg told ABC News over the weekend that a recession is “possible but not inevitable.”

While the risks have clearly increased, a recession is not an inevitable outcome.

No one, not even the Fed, knows exactly how all this will turn out. It’s impossible to say what happened to a $23 trillion economy two years after a once-in-a-century epidemic and in the middle of a war in Europe. There is no playbook for this.