Wells Fargo’s CEO says there is ‘no question’ that the US is heading into an economic downturn

Fears are mounting that a recession is nearly upon us, with a growing number of banks and investors joining the chorus or warnings that an economic contraction within the next few years is likely.   Wells Fargo’s CEO said there’s “no question” of an economic downturn in the US, and a recession looks challenging to avoid.

Speaking to The Wall Street Journal’s “Future of Everything Festival” on Tuesday, Charlie Scharf said, “It’s going to be hard to avoid some kind of recession.” 

(Image Credit: ANDY DAVIS for The WSJ)

U.S. inflation continues to sit at a four-decade high, and the Federal Reserve is aggressively raising interest rates to fight it. These two factors could combine to create a slowdown in growth, and likely tip the U.S. economy into a moderate recession, according to the latest economic outlook report released this week by Fannie Mae, a federally-backed mortgage guarantor.

He said businesses and consumers are still strong, but the world is reacting to the Federal Reserve as it raises interest rates to tame surging inflation.

“You’ve got the Fed saying the economy is running too hot, that we need to slow economic growth,” Scharf said. “Rates are going to rise, and it’s going to change the dynamic of the health of the consumer and business over a period of time.” He added that this strength would deteriorate.

US inflation is running at 40-year highs, and the Fed is under pressure to control it before it harms the economy. But there is concern the central bank could tip the economy into a recession by hiking rates too aggressively. The Fed raised interest rates by 50 basis points in May, the biggest increase at one meeting in 22 years. It also signaled that similarly, aggressive rate hikes would follow.

Scharf said while an economic downturn in the US is guaranteed, and a recession seems hard to escape from, the resilience of businesses and consumers would dampen its effect.  

“The fact that everyone is so strong going into this should hopefully provide a cushion such that whatever recession there is if there is one, is short and not all that deep,” he said.

Concerns of a recession vary on Wall Street. Bank of America and Deutsche Bank say the US will certainly enter into a recession. Others are less pessimistic, with JPMorgan and UBS acknowledging that economic pressures will persist, but they don’t see a full-on slowdown.

Lloyd Blankfein, a former CEO of Goldman Sachs, also warned of a high risk of recession for the US economy this week. He said companies and consumers should prepare for it. He also said the Fed would have to slow demand and slow the economy by hiking rates to control inflation, adding, “And that’s going to involve some pain.”  

Small Businesses Are Losing Confidence in U.S. Economy

ThecWall Street Journal also recently reported that small businesses are flashing warning signs on the U.S. economy like inflation, supply-chain snarls, a shortage of workers and rising interest rates darken the outlook for entrepreneurs.

Fifty-seven percent of small-business owners expect economic conditions in the U.S. to worsen in the next year, up from 42% in April and equal to the all-time low recorded in April 2020, according to a survey of more than 600 small businesses conducted in May for The Wall Street Journal by Vistage Worldwide Inc., a business-coaching and peer-advisory firm.

Small businesses are often the first to feel the effects of an economic downturn. Reports of diminishing optimism are coming from a variety of sectors, from manufacturing to consumer products and services.

Large companies also are feeling the strain of supply-chain problems, rising prices and labor shortages. Walmart Inc., the country’s largest retailer by revenue, said sales increased in the most recent quarter, but higher product, supply-chain and employee costs ate into profits. Target Corp. The Journal also reported that those chains are also seeing signs that consumers are beginning to curtail spending, particularly on discretionary purchases, as they deal with higher prices for fuel and other expenses.

Small businesses tend to have smaller cash cushions than big companies, making it tougher to weather economic storms. Many entrepreneurs say they have been worn down by more than two years of managing Covid-19 and a variety of economic challenges. Government-aid programs, which helped offset the economic pain, have largely run dry.

Some entrepreneurs have become more cautious about hiring as economic worries have grown. Andrew Shore, owner of Sea Pointe Design + Remodel, a residential remodeling firm in Irvine, Calif., had expected sales to increase by about 15% this year after climbing more than 40% in 2021. Now, he thinks sales will be closer to flat by the end of the year.