Federal Reserve Chairman Jerome Powell was asked whether he would say a “soft landing” was his base case for the U.S. economy at a press conference after the central bank’s September meeting. “No. I would not do that,” he bluntly told reporters. The soft landing scenario, where inflation is tamed without the need for a job-killing recession, is the most likely outcome for the U.S. economy in the minds of the Fed’s staff of economists, but not Powell’s.
The Fed chair even isolated a number of economic shocks that may cause significant headwinds in the coming months. “There is a long list,” he warned.
From risks that have been long anticipated, like the resumption of student loan payments and higher interest rates, to more emergent threats like the UAW strike, a potential government shutdown, and the recent rise in oil prices, here are five shocks that economic experts told Fortune are putting the soft landing in doubt.
"There are storm clouds out there forming that we're all seeing and watching—fearfully," Jesse Wheeler, senior economist at the decision intelligence firm MorningConsult, warned.
1 - The national debt is over $33 trillion and the government's about to shut down (again)
In January, the federal government hit the $31.4 trillion debt ceiling amid political gridlock in Washington. Lawmakers clashed over a budget deficit and spending levels, but eventually reached a bipartisan deal to prevent the U.S. from defaulting on its debts.
Now, though, some of the more conservative House Republicans argue that discretionary spending should be reduced by more than was agreed to less than a year ago. They note that the U.S. national debt soared above $33.1 trillion in September, and the cumulative national deficit between 2024–2033 is now projected to top $20.2 trillion due to increased spending.
So here we are at another budget standoff, and if Republicans and Democrats can’t reach an agreement, the government will shut down on Oct. 1.
Wells Fargo senior economist Mike Pugliese said he sees the odds of a shutdown “as more or less a coin flip.” And with the U.S. economy facing rising interest rates, high oil prices, and striking unions, he warned the impact could be severe.
“While there is never a good time for the federal government to shut down, the potential for one in the current economic environment is more concerning,” the veteran economist wrote in a recent note to clients. “Not only would a shutdown reduce economic growth modestly, but it would create a data vacuum at a time when the path ahead for the economy is highly uncertain.”
Battling inflation for over a year now, Fed Chair Powell has raised interest rates while promising to be “data dependent” when crafting monetary policy. But a government shutdown could result in the delayed release of critical economic data that he uses to do his job, including personal income, consumer spending, and GDP reports from the Department of Commerce and inflation and unemployment reports from the Department of Labor. The 2024 cost-of-living-adjustment for Social Security, usually released mid-October, could be delayed as well.
Pugliese explained that because employees involved in collecting and processing these reports and adjustments are considered “non-essential,” they wouldn’t be paid during a shutdown.
“The lack of data could raise the risk of a policy mistake in the form of inflation being allowed to fester or a sharper- than-expected slowdown in economic growth,” he wrote.
2 - Oil is headed north of $100 a barrel
Throughout U.S. history, oil price shocks have routinely helped to spark recessions. High oil prices increase costs for a broad range of companies and weigh on consumers’ budgets, which can lead to rising inflation and falling consumer spending.
It’s a recipe for economic disaster that the U.S. is facing once again today. Oil prices have soared since June amid production cuts from the world’s largest crude producers OPEC+, which includes Russia and Saudi Arabia. International benchmark Brent crude prices are up 28% from their June 11 low of $74 per barrel to over $95 per barrel.
View this interactive chart on Fortune.com
On top of that, commodities experts at a number of investment banks, including Goldman Sachs and Wells Fargo, argue that the rise in oil prices is just the beginning of a commodity “supercycle” that could keep inflation elevated.
Erik Knutzen, multi-asset chief investment officer at Neuberger Berman, a private investment management firm that manages over $440 billion in assets, told Fortune that the good news is that “a supercycle is always going to have its ups and downs.”
“Once people become concerned about a recession again—and I think they're starting to be—there could be short-term pressure on commodities prices,” he said.
But over the long term, consumers may need to become accustomed to higher oil and gasoline prices because there has been less incentive to invest in new crude production over the past few years, and that’s created supply and demand imbalances.
“There's been relatively less investment in oil and gas. And yet, we're still going to need energy even as we move through the transition to a net zero carbon economy,” Knutzen explained. “So you're starting to see some of the challenges associated with supply and demand, especially with the cuts that Saudi Arabia, Russia, and OPEC+ have been able to implement.”
3 - The UAW strike could crush the car market
Since Sept. 15, the United Auto Workers’ union has been engaged in a targeted but historic strike against Detroit’s big three automakers: Ford, GM, and Stellantis. In just one week, it’s cost the U.S. economy over $1.6 billion, according to a study from Anderson Group. And although the strike currently originally involved less than 15,000 union members, it is slowly becoming more widespread, making it a key risk to the Fed’s inflation fighting goal. Some 7,000 more union members left their jobs at a Ford plant in Chicago and a General Motors assembly factory near Lansing, Michigan on Friday.
The UAW is asking for substantial wage increases for its members. That could influence other workers to do the same across the nation, increasing inflation and forcing the Fed to hike interest rates even further.
“With unemployment low and a labor shortage, this strike will be a key test of just how much power labor has,” Brad McMillan, chief investment officer for Commonwealth Financial Network, told Fortune, adding that rising wages due to union efforts may “both slow the economy and drive inflation back up.”
There are more localized effects. With striking workers receiving only a percentage of their pay from the union while they strike, there will likely be reduced consumer spending in their communities for the duration of the action. The Michigan economy will take a hit, but it could make up for it if workers secure the higher wages they’re seeking (that’s what happened after the last UAW strike, in 2019).
“The prospect of a prolonged strike combined with a federal shutdown is the greatest threat to the American economy, future job growth, and our state's fiscal health if a deal is not made soon,” Zack Pohl, the chief of staff for Mich. Governor Gretchen Whitmer, said in a statement Friday. "Time is of the essence.”
The longer the strike goes on, the more effects the automakers, workers, suppliers, dealers, and consumers will feel. There’s already “anecdotal evidence” that new and used vehicle prices are rising “in anticipation of a sharp drop in inventories due to the strike,” Aichi Amemiya, a senior U.S. economist at the Japanese investment bank Nomura, explained in a Sept. 22 note.
That said, the Big Three aren’t as big as they used to be, at least nationally. If the strike lasts six weeks, it could decrease fourth-quarter gross domestic product growth, but only by around 0.2%, says Mark Zandi, chief economist at Moody's Analytics.
Still, chair Powell explained at his FOMC press conference in September that the impact on the economy from the UAW strike is still “uncertain.”
“We’ve looked back at history—it could affect economic output, hiring, and inflation. But that’s really going to depend on how broad it is and how long it’s sustained for,” he said.
4 - Nearly 44 million student loan borrowers will soon see payments restart
Economists and analysts have been calling the imminent return of federal student loan payments a likely shock to the economy for months. Nearly 44 million borrowers will start paying an average of $393 per month to their loan servicers after a three-and-a-half-year hiatus. Inevitably, that will mean less spending elsewhere, at least for some households.
Estimates have varied on the potential economic impact. Consumer spending in the U.S. could fall by as much as $9 billion each month, according to a July report by Oxford Economics, shaving 0.1% off gross domestic product growth in 2023 and 0.3% in 2024. Meanwhile, investment bank Jefferies puts the income hit at $18 billion per month.
This has implications for retail spending, Jefferies added, as it downgraded both Nike and Foot Locker, arguing that households likely haven’t budgeted for the return of the monthly bills. The firm calls the return of payments a “key pain point” for consumer stocks through the end of the year.
"We believe US consumers are likely to curtail spending ahead, with apparel & footwear being the most likely areas of pullback," Corey Tarlowe, an analyst at Jefferies, wrote in a research note. "With the resumption of student loan repayments, we believe this could be a catalyst that weighs further on already soft sales at some of our specialty apparel coverage."
It’s not just consumer spending that will be impacted. Borrowers also report they will be able to save less and sock away less for retirement. Over 70% of households earning at least $100,000 say they expect to miss at least one payment when they resume, according to Morning Consult.
Some experts are more optimistic about the economic outlook once payments resume. Oxford Economics expects mid- and high-income households to be able to more or less take the monthly bills in stride, while lower-income households will feel the most strain.
And thanks to two programs from the federal government, there may not be many visible economic effects at all, says Dean Baker, founder and senior economist at the Center for Economic and Policy Research. Baker says the Biden administration’s new, more generous income-driven repayment plan and the 12-month grace period will help dull many of the negative economic impacts of the return of payments.
“There’s not going to be any great consequence if someone doesn’t immediately start paying,” says Baker. “I don’t think it will be catastrophic.”
5 - Mortgage rates nearing 8% threatens to restart the housing deep freeze
The Fed has been raising interest rates to help curb inflation by slowing down the economy. This presents many challenges for investors, businesses, and consumers alike—and particularly for home buyers, who are facing the highest interest rates in more than two decades, with the 30-year rate nearing 7.5%, a far cry from the sub-3% days of the early pandemic.
Higher rates make buying a home even more unaffordable after years of soaring prices. The average monthly principal and interest payment for borrowers hit $2,306 in July, the highest on record, according to Black Knight, a real estate analytics firm. That’s up 60% from two years ago. Nearly 25% of July homebuyers have monthly payments of at least $3,000, per Black Knight—up from just 5% in 2021. More than 50% of homebuyers pay at least $2,000 per month.
Though the economy has been on relatively solid footing so far this year, further rate hikes from the Fed could complicate matters—including slowing down home sales. That has ripple effects throughout the economy, says Jeff Rose, certified financial planner and founder of GoodFinancialCents.com. Rose notes in the 1980s, high mortgage rates contributed to a recession.
The high rates “can lead to a drop in consumer spending and can hit the housing market hard,” says Rose. “When people are paying more on their mortgages, they have less to spend elsewhere, which can slow down economic growth.”
It’s not just consumers: Businesses also slow spending and investments when rates are higher.
But Dottie Herman, vice chair and former CEO of Douglas Elliman Real Estate, says the rates only seem high because of historic lows they hit during the pandemic. Rather than sending shockwaves through the financial system, higher mortgage rates are acting as more of a gradual brake.
“I don't think it's a shock to the economy, but rather a swift 'correction' following a once-in-a-lifetime event,” Herman says.
Darren Tooley, senior loan officer at Michigan-based Cornerstone Financial Services, agrees, adding that although the higher rates have temporarily priced some out of the market, other economic factors, like the unemployment rate, remain strong.
“The fact mortgage interest rates have reached their highest levels in more than 20 years has not had the effect on the economy as most would have thought,” Tooley says.
The Fed left interest rates unchanged in September, indicating it believes the economy is doing okay. It is expected to raise them one more time this year.
