Warren Buffett Is Downbeat on U.S. Economy. Is He Right?

When Warren Buffett speaks, investors pay attention. It's hardly surprising, given that the 92-year-old has amassed a fortune of over $100 billion, making him the fifth-richest person on Bloomberg's Billionaires Index. Indeed, the annual meeting of Berkshire Hathaway, the investment firm he has led for over 50 years, has been dubbed the "Woodstock for Capitalists."

This year's event took place last weekend and was attended by tens of thousands of people. Buffett and his vice chairman, Charlie Munger, talked about everything from AI to the banking industry and the U.S. economy. Buffett warned that the economic climate has changed a lot in the past six months and said a lot of businesses will report lower earnings this year.

Why Buffett is downbeat on the U.S. economy

The Oracle of Omaha has concerns about the U.S. in the short term. But, in fairness to Buffett, he's still positive about the U.S. He told shareholders that given the choice, America is the country he'd want to be born in if he were to be born today. He also thinks the U.S. dollar will continue to be the reserve currency.

All the same, he thinks that what's been an "incredible period" for the economy is coming to an end. He said many of the businesses in Berkshire's portfolio had benefited from low interest rates and government economic stimulus in recent years. Buffett believes this period is now over. According to Insider, he said, "It's a different climate than it was six months ago."

Buffett raised concerns about increased tensions between the U.S. and China and expressed a hope that the two world superpowers could find a route where both prosper. Munger warned of issues in commercial real estate, and both men were uneasy about the ongoing banking crisis.

Throw in high interest rates and Buffett is not optimistic about the near-term performance of a number of companies. "The majority of our businesses will actually report lower earnings this year than last year," he said. He added that some companies were caught by surprise by the economic changes and have too much inventory on order.

Another warning sign is that Berkshire has made a combined $25 billion in net-equity security sales over the past two quarters, according to The Motley Fool. This increases its already sizable cash reserves to around $130 billion. This could signal a lack of confidence in the stock market as well as demonstrating that Buffett and his team don't see many buying opportunities right now.

Is he right?

Buffett may be a highly respected and successful investor, but he doesn't always get things right. He initially steered clear of tech companies because it isn't an industry he understands deeply, which meant he missed early opportunities with companies like Google and Amazon.

However, his cautious approach to the U.S. economy is understandable right now. We don't know how the banking crisis will play out, though Buffett says the FDIC and government have no interest in allowing Americans to lose their deposits. The full impact of the Federal Reserve's aggressive rate hikes has yet to fully play out. Higher rates are designed to slow the economy by making it more expensive to borrow, which the Fed hopes will reduce inflation. It may also tip us into a recession.

Bottom line

Given that we've been hearing the sky will fall for quite some time, it's tempting to dismiss the latest wave of recession warnings as fear mongering. For sure, Buffett's words will come as a blow to those economists who think we can still avoid a recession. We might. But there's also no harm in being prepared.

One leaf we can all take out of Buffett's playbook is to have cash in the bank so we can either pounce on investment opportunities or weather economic storms. If you're able to stash extra cash into a savings account and take steps to pay down debt, both will make your finances more resilient.