A Recession Is Still Well on Its Way. In Fact, We May Already Be in One

The odds of recession haven't faded with a last-minute deal to avert a government shutdown, with plenty of other ominous indicators pointing to a significant economic slowdown.

First off, a government shutdown is still possible after the stop-gap spending deal expires in 45 days. Then there's the auto workers strike, surging oil prices, the resumption of student loan payments, tighter lending standards at banks, and a global economic downturn led by the world's second-largest economy, China, which is buckling under a real estate crisis.

Add to that the 525 basis points of interest rate hikes from the Fed since March 2022, which are still winding their way through the economy. Their effects can lag for 18 to 24 months, which means their full force won't be felt until the end of this year or early 2024.

Bloomberg Economics reports these factors could easily shave a full percentage point off growth in the nation's gross domestic product in the fourth quarter.

"Add those shocks to other powerful forces at work on the economy — from dwindling pandemic savings to soaring interest rates and now oil prices too — and the combined impact could be enough to tip the US into a downturn as early as this year," Bloomberg Economics reports. "A recession remains Bloomberg Economics' base case."

To be sure, a soft landing for the economy is also still a possibility.

For all the predictions of a recession, the economy has continued to grow at a pace of more than 2% throughout the first half of this year. The labor market, though showing some signs of weakening, remains strong. And economists at major banks have lowered the odds they see of a recession this year.

Recession May Have Already Started

Bloomberg Economics built a model that mimics the one used by the National Bureau of Economic Research, the official arbiter of recessions. "What it says about the future: There’s a better-than-even chance that sometime next year, the NBER will declare that a US recession began in the closing months of 2023," Bloomberg Economics said.

When it comes to recessions, it is not always darkest before the dawn. History shows markets, bankers, economists and officials are often lulled into complacency.

Here's what Treasury Secretary Janet Yellen once said.

“The most likely outcome is that the economy will move forward toward a soft landing.”

She said this when she served as President of the Federal Reserve Bank of San Francisco in October 2007, just two months before the Great Recession began.