The U.S. economy will slip into recession by the fourth quarter amid troubles in the banking industry, according to billionaire investor Bill Gross.
“Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly. Recession in fourth quarter,” Mr. Gross, the so-called “Bond King” and co-founder of Pacific Investment Management Co. (PIMCO), said in an Oct. 23 post on X.
His comments come as the U.S. banking system is under a crisis since the failure of the Silicon Valley Bank (SVB) in March. Though the overall liquidity of the U.S. banking system has grown between the first and second quarters, the standard deviation also rose, meaning that there were more banks with smaller liquidity buffers and, thus, at a higher risk of failure.
Meanwhile, car loan defaults in the United States have hit a record high, according to data from Fitch Rating. The percentage of subprime auto borrowers who are at least 60 days past due rose to 6.11 percent in September. This is a delinquency rate unseen in the history of Fitch’s delinquency index.
Back in February, PIMCO had forecast that the U.S. economy was heading toward a recession. Like PIMCO, other investment companies also hold similar views.
In an Oct. 13 post, investment firm Charles Schwab suggested that while the current pace of economic slowdowns may be “post-pandemic normalizations, not recession signals,” the risks of recession “are still with us.”
This is “evidenced by the recent triple threat of the increase in the value of the U.S. dollar, oil prices, and Treasury bond yields,” Charles Schwab said. “All three metrics have moved higher since the summer, each putting downward pressure on key areas of the economy and market.”
“We continue to think the magnitude of the moves in interest rates, oil, and the dollar will matter more than the levels for the market, at least in the near term,” it stated. “Undoubtedly, all three have contributed to the S&P 500 Index’s decline since its July peak.” U.S. GDP growth has declined over the past quarters.
Meanwhile, Mr. Gross believes the “best investments” right now are in equity arbitrages, citing two stocks—fashion company Capri Holdings and biotech firm Seagen Inc. He also suggested that cloud computing firm VMware may be a “long shot” investment.
The PIMCO co-founder is also “seriously considering regional banks again” to invest in. As to bonds, he suggested “invest in the curve. Various combinations 2/10, 2/5. Should go positive before year end.”
Recession Indications
The Federal Reserve has been raising rates since March last year in a bid to rein in inflation. Some officials at the central bank are now giving signals of a potential economic slowdown.In an Oct. 18 speech in London, Fed Governor Christopher Waller said that while inflation has lowered and wage growth has moderated, “things are looking a little too good to be true.”
“It makes me think that something’s gotta give. Either growth moderates, fostering conditions that support continued progress toward our 2 percent inflation objective, or growth doesn’t, possibly undermining that progress.”
“As of today, it is too soon to tell. Consequently, I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate.”
According to an Oct. 10 Bankrate survey, the nation’s top economists rated the odds of a recession between now and September 2024 at 46 percent. This is the lowest odds since first quarter 2022.
Tuan Nguyen, an economist at consultancy RSM, said that there is a “large chance that the economy can achieve a soft landing … we expect the economy will muddle through the rest of 2023 and 2024 without sinking into a downturn.”
However, Bankrate senior economic analyst Mark Hamrick sees a stronger chance of a recession hitting the United States.
“It is quite remarkable that we’ve gone close to two years now where we’ve been on high alert for a recession, and yet one has yet to materialize for the broader U.S. economy. Unfortunately, the odds of an economic contraction remain elevated,” he said.
Last week, the U.S. 10-year Treasury note briefly breached the 5 percent rate, strengthening worries about a recession. It hit a high of 5.029 percent last week, the highest yield since 2007 just before the Great Recession.
Meanwhile, the Conference Board Leading Economic Index (LEI) for the United States fell in September, marking a year and a half of continuous monthly declines.
The LEI provides an early indication of potential “significant turning points” in the business cycle and where the economy is heading, according to an Oct. 19 press release.
“Although the six-month growth rate in the LEI is somewhat less negative, and the recession signal did not sound, it still signals risk of economic weakness ahead,” said Justyna Zabinska-La Monica, senior manager, Business Cycle Indicators, at The Conference Board.
“So far, the U.S. economy has shown considerable resilience despite pressures from rising interest rates and high inflation. Nonetheless, The Conference Board forecasts that this trend will not be sustained for much longer, and a shallow recession is likely in the first half of 2024.”
