The US economy will enter recession territory in the second quarter of next year, according to Fitch Ratings, but strong consumer finances will help cushion the blow.
The ratings agency said in a report Tuesday that a forthcoming recession will likely be mild and more in line with the downturn in the early 1990s.
„Fitch expects the U.S. economy to enter genuine recession territory — albeit relatively mild by historical standards — in 2Q23,” said Olu Sonola, Fitch’s head of U.S. regional economics, in a statement. „The projected recession is quite similar to that of 1990–1991, which followed similarly rapid Fed tightening in 1989–1990. Nevertheless, downside risks stem from nonfinancial debt-to-GDP ratios, which are much higher now than in the 1990s.”
From the third quarter of 1990 to the first quarter of 1991, GDP contracted by 1.8%. That recession also coincided a spike in oil prices caused by Iraq’s invasion of Kuwait in the summer of 1990.
Energy prices jumped this year after Russia invaded Ukraine. While oil and gasoline prices have come off highs, they remain well above year-ago levels.
Fitch said Tuesday that any weakness in consumer sentiment is tied more to gasoline prices than consumer spending, which is buoyed by robust finances.
Despite the sharp dive in stocks this year, the aggregate household balance sheet remains resilient as real estate wealth offset some equity losses, Fitch said.
Household excess savings remained elevated at $1.5 trillion in July of this year, although lower than the $2.2 trillion peak in August of 2021, Fitch said.
It also noted that household debt service remains low compared to previous periods of economic turmoil, while „household liabilities have also remained muted, in contrast to the elevated risks associated with consumer liabilities entering the Great Recession.”
In addition, Fitch cited gains in real household income and low unemployment, which at 3.5% is equal to pre-pandemic levels and at 50-year lows.