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Rising Probability of Recession in the US Economy


Rising Probability of Recession in the US Economy

Former Goldman Sachs partner and Columbia Business School professor, Abby Joseph Cohen, has expressed her concerns about the increasing likelihood of a recession in the US economy. In a recent interview on CNBC’s “Squawk Box,” Cohen discussed her forecasts for the next 12 to 18 months.

While some investors and analysts may no longer consider a recession as the base case scenario, Cohen highlights that the probability of an economic downturn has been steadily rising in recent months. Drawing a comparison to 18 months ago, when concerns were high as the Federal Reserve embarked on raising interest rates to curb inflation, Cohen notes that the current economic conditions are not as favorable.

In the past, the US economy benefited from a robust consumer sector supported by government stimulus payments and temporary relief on student loan repayments during the pandemic, along with a healthy labor market. However, Cohen suggests that the tailwinds supporting the economy have weakened.

Although Cohen does not believe that a recession is imminent, she acknowledges that the situation is not as easy as it was 18 months ago. Looking ahead, Cohen anticipates that forecasting the US economy will be more challenging due to political factors, specifically during an election year, which could impact the outlook.

One such potential issue is the Sept. 30 deadline for Congress to reach an agreement on a new federal budget. Failure to meet this deadline could result in a government shutdown, further adding uncertainty to the economic landscape.

Stay updated with Congress’s stance and possible implications for the markets.

The Implications of a Government Shutdown

As the end of September approaches, the question of whether Congress will pass a budget deal to keep the federal government funded looms large. While many Republicans express a desire to reach a compromise, there are dissenting voices within their ranks. This could lead to a potential government shutdown and a host of consequences that are difficult to quantify.

One of the major concerns is the impact on social security payments. If a budget deal is not reached, there will likely be disruptions in these crucial payments. Additionally, the international community will view the U.S. Congress as “somewhat dysfunctional” once again, following the debt-ceiling standoff earlier this year. This could have far-reaching effects, including pressure on the dollar and the Treasury, unrelated to the state of the economy.

It is important to note that funding for the federal government is set to expire at the end of September. To avoid the fourth shutdown in a decade, the White House has called on Congress to pass a short-term “continuing resolution.” This would keep the government funded beyond September 30th.

The most recent government shutdown occurred under former President Donald Trump from December 2018 to January 2019.

Potential Political Ramifications

In addition to the immediate consequences, analysts suggest that a government shutdown could harm Republicans’ chances in the 2024 election. The impact on the public’s perception of the party’s ability to govern effectively cannot be underestimated.

Market Response

On a different note, U.S. stocks saw a rebound on Friday morning after a four-session losing streak for the Nasdaq Composite. The S&P 500 is projected to experience a 1% weekly decline, while the Dow Jones Industrial Average has dropped by 0.7% and the Nasdaq by 1.5% over the course of the week, according to FactSet data.

In conclusion, the potential for a government shutdown carries significant implications. From social security payments to the international perception of the U.S. Congress, the consequences could be far-reaching and difficult to measure. It remains to be seen whether Congress will act in time to prevent a shutdown and its accompanying fallout.

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