Not a real recession yet but Fed tightening may get us there
The strong labor market remains an engine of growth for the economy, keeping retail spending solid and supporting household incomes. But inflation accelerated further in June and rising costs — along with the Fed tightening to bring inflation down — are starting to negatively impact consumer and business behavior. Consumer and small business survey data suggest much weaker activity ahead, trends which should help to slow inflation but also put the economy at risk of slipping into a recession if the Fed sticks to its projected path for rate tightening over the next year.
Strong momentum within the labor market continues to drive solid consumer spending and makes the odds of a recession still relatively remote in the near term. But inflation should remain elevated into 2023, prompting further sharp rate increases by the Fed as well as reductions in household and business activity. The yield curve could see a sustained inversion as soon as this fall — historically, a clear signal of an economic downturn within about 12 months. A soft landing remains possible if supply chain problems heal sufficiently, allowing the Fed to stop tightening (or even ease) sooner than expected, but the window is closing rapidly.