15-year high rates, recession cues seen to derail US economy

Across the world, pandemic-related disruptions to global supply chains and the effects of Russia’s war in Ukraine have driven up prices of energy, commodities and necessities.
As the Federal Reserve’s most aggressive interest-rate hike cycle in a generation filters through the US economy, the gap is widening between the haves and the have-nots.
Even without a recession, households and businesses are feeling the financial pain.
The highest interest rates in 15 years are delaying home dreams, putting business plans on ice and forcing many Americans to agree to loan terms that would have been unimaginable just nine months ago.
Most of all, the surge in borrowing costs is punishing the cash-poor. And it’s about to get worse as the Fed carries on with its anti-inflation campaign and keeps hiking rates next year.
As US mortgage rates hit their highest levels since 2001 this year, real estate agents suddenly found themselves hunting for clients again — if not losing their jobs.
Thousands of mortgage employees have already been laid off at lenders including Wells Fargo and JPMorgan Chase.
The widening gap between the cash-rich and the cash-strapped is playing out at car dealerships across the nation. The former are paying more upfront, while the latter are stuck with high-rate auto loans that will leave them underwater — or forced to settle for cheaper and less reliable vehicles.
Interest rates on credit cards that averaged 16.3% at the beginning of the year have climbed to just over 19%, according to Bankrate.com, the highest level in data going back to 1985.
And American consumers will end the year with about $110bn more in credit-card debt than they started with, which would be close to an annual record, according to WalletHub, an online personal finance data firm.
Come 2023, when many economists predict the US will enter a recession.
Economists say there is a 7-in-10 likelihood that the US economy will sink into a recession next year, slashing demand forecasts and trimming inflation projections in the wake of massive interest-rate hikes.
The probability of a downturn in 2023 climbed from 65% odds in November and is more than double what it was six months ago, according to the latest Bloomberg monthly survey of economists.
The median estimates see gross domestic product averaging a paltry 0.3% next year, including an annualised 0.7% decline in the second quarter and flat readings in the first and third quarters.
Consumer spending, which accounts for about two-thirds of GDP, is projected to barely grow in the middle half of the year.
This year, the Fed raised rates by 4.25 percentage points, including four 75 basis-point hikes.
A key reason the Fed is likely to keep higher rates in place for an extended period is the resiliency of the job market.
As the economy weakens, however, employment is seen succumbing. Economists expect payrolls to decline in the second and third quarters, and by the first quarter of 2024 the jobless rate is expected to peak at an average 4.9%.
Fed officials expect growth to slow to a crawl of 0.5% next year, while unemployment rises almost a percentage point to 4.6% — which likely means more than 1mn Americans would lose their jobs.
The key issue is the rate of inflation.
The Federal Reserve Bank of Dallas found that from mid-2021 to mid-2022, American workers faced the biggest decline in real wages in about 25 years — roughly 8.5% with inflation factored in.