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Investment banks are sounding the recession alarm — and Main Street is starting to fret about economic slowdown as well

·2 min read
Main Street
Investors are starting to fret about a potential recession - and Main Street seems to agree, with consumer sentiment plunging this week.Justin Sullivan/Getty Images
  • Morgan Stanley, UBS and Wells Fargo all said that a recession became more likely last week.

  • Ordinary Americans seem to agree, with consumer sentiment polls plummeting.

  • The Federal Reserve is hiking interest rates to curb inflation - but that could slow down growth.

One word dominated Wall Street's coverage of last Wednesday's Federal Reserve meeting: recession.

Equity chiefs like Morgan Stanley's Mike Wilson, economists like Wells Fargo's Jay Bryson, and billionaire investors like Leon Cooperman all warned this week that an economic downturn is becoming more likely.

"[Rising rates] raises the risk of a recession, because you're bringing rate hikes forward even faster," Wilson told CNBC's 'Closing Bell' last week. "The Fed is hiking into a slowdown, and they don't really have a lot of options."

The Fed is hiking interest rates as it looks to tackle soaring inflation. But there's every risk that the resulting economic contraction tips the US into a recession — typically defined as two consecutive quarters of negative growth, accompanied by a rise in unemployment and a sharp slowdown in business activity.

UBS became the latest bank to predict an economic downturn Friday.

"The more aggressive line by central banks adds to headwinds for both economic growth and equities," the Swiss bank's chief investment officer Mark Haefele said. "The risks of a recession are rising, while achieving a soft landing for the US economy appears increasingly challenging."

And away from Wall Street, ordinary Americans are starting to fret about the economy as well.

The Michigan Consumer Sentiment Index, which measures Main Street's attitude towards the overall business climate, fell sharply to a record low of 50.2 points this month, far below analysts' initial prediction of 58.

"The crash in sentiment means that consumers are more and more worried about future economic conditions," LPL Financial's chief economist Jeffrey Roach said. "Recession risks are rising for next year, especially if high prices get entrenched in the economy."

Consumer sentiment has typically been used as a gauge of future consumer spending, which accounts for roughly three quarters of gross domestic product.

Sliding consumer sentiment has coincided with dire numbers coming out of the retail sector, meaning Americans are spending much less at stores and restaurants as inflation soars. Consumers tend to spend less and save more when they're worried about the overall state of the economy, as evidenced by a slump in mortgage applications.

And investment bankers can learn a lot from how Main Street feels about the economy, according to LPL's Roach.

"We need to listen to what consumers say," he said. "But more importantly, we need to watch what consumers do."

Read more: Avoiding a recession would be a 'pleasant surprise' as risks to the economy mount and the housing market starts to weaken, says a portfolio manager who's beaten 89% of peers this year — but these 5 cheap groups of stocks should thrive anyway

Read the original article on Business Insider

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