Economist Warns of Impending U.S. Recession

Steve Blitz, the chief U.S. economist at TS Lombard, who had earlier warned about the precarious state of the U.S. banking system, now predicts that a long-awaited recession may finally be on the horizon. In a recent research note, Blitz reiterated his recession view, citing several factors contributing to an overall weakening of the U.S. economy.

The pace of lending growth at small and large banks in the United States has slowed considerably, indicating that banks are being more cautious with their lending practices. This trend has been observed for most of this year, especially among large banks. Such restrained lending policies are a significant reason why companies’ profits have been dwindling again in Q2 2019.

Moreover, the U.S. Treasury’s decision to issue a large number of T-bills to refill its coffers might divert away even more money from markets and the economy. BofA Global strategists estimate that Treasury could issue up to $1 trillion in bills before the end of August. T-bills are short-term bonds with maturities of four to 52 weeks.

These factors signify a slow-down in the U.S. economy, and Blitz warns that the current bullish stock market could come to an abrupt halt if things don’t change. The S&P 500 index has risen nearly 14% this year so far, thanks to investors’ confidence in the economy, but such a trend could reverse quickly in the event of an impending recession.

Signs of Slowing Corporate Earnings Growth with Possible Economic Consequences

Market analysts on Wall Street may have higher expectations for corporate earnings, but the Treasury Department data of the US tells a different story. The slowdown in quarterly tax payments in 2023 suggests the continual decline of earnings since the first quarter of 2023 where profits for S&P 500 firms previously contracted on a YoY basis according to FactSet. Based on a TS Lombard analysis, there’s a 12% fall in corporate tax receipts to date through June 16.

Lower tax payments translate to lower profits leading to potential layoffs and sluggish wage growth, which might further worsen the economy given the recent slowdown in credit creation and issuance of T-bill. Blitz noted that lower corporate earnings are an impending warning of decreased personal income and employment.

Stocks among investors may be up for this year, hoping that the U.S. economy may avoid a possible recession. However, Blitz addressed that corporate profits could lead to lower employment. Dismissing the surge in housing starts last month as a one-time anomaly, he notes that economic factors are pointing to an economic slowdown in the near future. Commerce Department data released Tuesday showed that U.S home-building increased by 21.7% YoY in May, surpassing economists’ expectations for a modest decline.

U.S. Housing Starts Surge in May

U.S. single-family home construction saw a surge in May, highlighting a rev-up in the housing sector. However, a lingering housing shortage continues to persist. Experts believe that housing plays a vital role in preventing a recession, as construction activity is not usually associated with economic downturns.

Veteran economist David Blitz warns that May’s figures may be an outlier, rooted in the jump of homes sold in April which had not yet begun construction. Blitz believes that recessions are unlikely to occur when construction is roaring ahead. His claims are backed by data indicating a fall in railcar loadings of lumber and metal products, which signifies the waning of the manufacturing industry’s upturn.

Blitz further added that even if the U.S manages to avoid a recession, the Federal Reserve and markets could face other problems such as inflation. “Absent a recession, inflation will reaccelerate later in the year. Not to 8% or so,” he said, adding that “5% is more likely.” 

In February, Blitz warned of the vulnerability of small U.S. banks due to a multitude of factors, which included sparse reserves and an asset-liability mismatch between their loans and the short-term nature of their deposit obligations. This prediction came true in March when Silicon Valley Bank declared federal receivership following a bank run triggered by its last-ditch attempt to raise funds.

Although Wall Street economists anticipated a recession to begin as soon as Q1 of 2023, the economy has remained unexpectedly resilient to the Fed’s interest-rate hikes. The central bank has raised borrowing costs by five percentage points since March 2022.

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