Ex-Treasury Secretary Predicts ‘70 Percent’ Chance Recession Begins This Year

Ex-Treasury Secretary Lawrence Summers during a press conference in Venice, Italy, on July 9, 2021. Andreas Solaro/AFP via Getty Images

A recession is most likely right around the corner, said a former Clinton and Obama administration official in a Sunday morning warning.

“The chance that a recession will have begun this year in the U.S. is probably about 70 percent. I think that puts me at the pessimistic end of the spectrum of opinion,” he wrote on Twitter.

Some economists have recently become more optimistic about the United States avoiding a possible recession after months of positive jobs reports and other relatively positive economic indicators. However, negativity about the state of the economy again emerged after a series of bank failures coupled with federal bailout efforts last month.

Summers was the former Treasury Secretary under former President Bill Clinton and was the former head of the National Economic Council under President Barack Obama.

“It’s not something we can be certain of, but as I put together the lags associated with monetary policy, the credit crunch risk, the need for continuing action around inflation, the risk of geopolitical or other shocks affecting commodities, 70 percent would be the range that I would be in,” Summers told Foreign Policy on Sunday, adding that he believes a recession will come within the coming 12 months.

Last week, another former U.S. Treasury secretary, Hank Paulson, told the Financial Times that he, too, believes a recession will be coming due to the banking crisis. About a month ago, both Silicon Valley Bank and Signature Bank collapsed, forcing the Treasury, Federal Reserve, and Federal Deposit Insurance Corporation to intervene.

“Some things we know and some things we don’t know,” Paulson told the paper. “What we know is that if you’re running a small or regional bank right now, you wouldn’t be lending. The capital markets shut down for two or three weeks. Now they’re opening but not to the extent they were. So I think it’s pretty likely we will see a recession if you look at what’s happening to credit.”

He did not predict when those factors might impact the U.S. economy. “It will take a while to manifest itself,” he said.

“Another thing we are almost certain to see is credit provision moving outside the regulated banking sector,” Paulson said. “This is different to the extent that the panic moves quicker when you have social media, and Twitter, and who knows where it’s going to crop up again. There will be a lot of focus on Europe, where financial institutions aren’t as strong or as well capitalized as they are here.”

More Data

Meanwhile, Bureau of Labor Statistics data released last month shows that the U.S. economy added 236,000 jobs in March while the unemployment rate dropped to 3.5 percent.

In a National Association for Business Economics survey about a month ago, 58 percent of 48 economists who responded envision a recession sometime this year, the same proportion who said so in the NABE’s survey in December. But only a quarter think a recession will have begun by the end of March, only half the proportion who had thought so in December.

A man begs for money along a street in Melbourne's city center on Sept. 17, 2020. William West / AFP via Getty Images

The findings, reflecting a survey of economists from businesses, trade associations, and academia, were released Monday. A third of the economists who responded to the survey now expect a recession to begin in the April–June quarter. One-fifth think it will start in the July–September quarter.

Most economists told The Associated Press last month they think growth is slowing sharply in the current January–March quarter, in part because the Federal Reserve has steadily raised interest rates in its drive to curb inflation.

The central bank has raised its benchmark interest rate nine times over the past year. The Fed’s policymakers are betting that they can achieve a so-called soft landing—slowing growth just enough to tame inflation without tipping the world’s biggest economy into recession.

The resulting surge in borrowing costs has walloped the housing industry and made it more expensive for consumers and businesses to spend and invest in major purchases.

Yet as higher loan costs spread through the economy, analysts are generally skeptical that the United States can avoid a downturn. The main point of debate is whether a recession will prove mild, with only minor damage to hiring and growth, or severe, with waves of layoffs.

The Associated Press contributed to this report.