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- The US's chances of avoiding a recession just got smaller, according to Mohamed El-Erian.
- The top economist pointed to two trends that could help push the economy into a downturn.
- The New York Fed has priced in a 56% chance of a recession happening by September 2024.
There are two reasons why America's odds of avoiding a recession may be dwindling, according to top economist Mohamed El-Erian.
The Allianz chief economic adviser has repeatedly sounded the alarm for a coming recession since 2022, the year the Federal Reserve began to aggressively raise interest rates to fight inflation. Then, prices in the economy began to cool, fueling hope that central bankers could possibly steer the economy into a soft-landing and get inflation under control without having to spark a damaging recession.
But the risk of a downturn has edged up, El-Erian said in an op-ed for the Financial Times on Thursday, as there are two factors that could spark a downturn.
1. An "intense" period of rising rates
The Fed's interest rate hikes have steadily pushed up borrowing costs and are causing pain all over the economy.
Yields on the 10-year US Treasury bond have jumped an "eye-popping" percentage point since the end of the June, El-Erian said, which has hiked the cost of borrowing for companies and households. Mortgage rates, meanwhile, just notched a 23-year high and are edging closer to 8%.
Higher yields have also added strain to the banking sector, as more investors are reallocating their cash to money market accounts.
"For well over a year now, I have argued that the US is able to avoid the 2023 recession that many were repeatedly calling. I am now less confident about what's in store for 2024 given how the recent surge in rates compounds the erosion in financial, human and institutional resilience," El-Erian said.
2. Resurgent inflation
Inflation has cooled considerably from its highs last summer, but there's a chance it could still rebound as price pressures remain in the economy.
Inflation re-accelerated in August to 3.7% year-over-year, higher than the 3.2% reported in July.
"Adding fuel to this fire are high prices for oil amid solid demand, continued production cuts by OPEC+ and heavily depleted inventories. There is a material risk of this leading to higher inflation for a broader range of goods and services," El-Erian wrote.
Though oil prices cooled slightly this week, they've surged over the last month on fears of tight supply, with Brent and West Texas Intermediate crude both trading around a 10-month high in September.
Energy prices were the largest contributor to inflation in August, the Bureau of Labor Statistics said.
That spells bad news for the economy and for stocks, as resurgent inflation could eat into corporate profits.
"These are developments that the economy and markets do not enjoy. They damp growth and increase the threat of stagflation," El-Erian said. "While markets are adjusting fast to higher rates, that of the real economy is at much earlier phase with now a much bumpier road ahead."
Other market commentators have warned of growing recession odds in recent weeks. The yield curve, the bond market's notorious recession gauge, has started to de-invert -- a classic sign that a downturn could be around the corner.
The New York Fed, meanwhile, has priced in a 56% chance that the US could tip into recession by September of next year, slightly lower than the 61% chance it had predicted in August.