Why this expert says everyone is wrong about the US recession

A: I still don’t have a recession (in my estimation). Obviously, the risk of a recession is high – I mean, obviously, when inflation is really high and the Fed is at DEFCON 1 and really focused on lowering inflation by pushing up interest rates, and the sentiment is depressing, isn’t it?

I talk to CEOs, CFOs, investors, friends, family – to those people, they think we’re going into a recession. I’ve never seen anything like it. I have seen many business cycles now. And no one predicts a recession. But this one, everyone predicts a recession. So when sentiment is so fragile, it doesn’t take much to push us. I think with a little luck, and some pretty good policymaking by the Fed, we’ll be able to avoid a recession. But I’m not saying that with great confidence.

I don’t think we need a recession to bring inflation back. Oil prices will roll over. Natural gas prices will fall. We will see vehicle prices drop as supply chain issues are resolved and we get more vehicle production. Commodity prices, the prices of goods more broadly, will come in.

Q: When you lower your GDP growth outlook, you say it’s likely that the economic expansion will continue. What specifically do you think there?

A: The thing that comforts me most is that, in my mind, the dividing wall between a growing economy and a recession is the American consumer. If American consumers stick around, just do their part, shop as usual, we’ll avoid a recession. And by the way, if American consumers stick around, they’ll keep the global economy moving forward too. You know, some parts of the global economy will come in, but it’s the kind of US consumer who is driving the trains right now.

And if you look at American consumers, they’re in pretty good shape. Obviously, they’re hit by high inflation right now, but they have a lot of excess savings they’ve accumulated during the pandemic and that’s happening across all income groups.

For a typical American household, according to my calculations, in June they had an excess of $US7000-$US8000 in savings. So if I pay $US500 more a month for higher inflation and I have $US7000-$US8000 in excess savings, you can do the arithmetic. That gives me a little time, doesn’t it? I can use the excess savings to supplement my income, to offset the adverse effects of high inflation.

Low debt. The debt service burden is almost as low as before. People have locked in previous record low interest rates through refinancing. So they are very insulated from higher rates. You know, stock prices go down, but house prices go up. People are richer today.

Q: Speaking of house prices, I can’t help but wonder if we’re in for a pretty bad cooling of the housing market. And that’s just an important component of the economy. What will housing look like for you in the next year or two? And what are the potential ripple effects of cooling across the economy?

A: Oh, it’s cold. It goes into deep freeze pretty quickly here. Mortgage rates in the south are only 6 percent, nearly double from last year. And you just take that higher interest rate, you multiply that by the higher house price, and you look at the monthly payments that first-time homebuyers face – now $US500-$US600 more than last year. It’s forbidden.

But I will say two other things about this one. It’s by design, right? The Federal Reserve raised interest rates to slow growth. And that happens through the sectors of the economy that are most sensitive to exchange rates. Housing is the sector of the economy that is most sensitive to interest rates. So, this is not a big surprise. This is exactly what you would expect.

And secondly, I don’t expect prices to fall, because the mortgage lending that has been made since the financial crisis and housing collapse returned more than a decade ago has been fantastic. I must disclose this: I am on the board of directors of MGIC, a publicly traded national mortgage insurance company, and I am chair of the risk committee. So I look at underwriting very carefully and it’s been pristine since the collapse. And the other thing is, it’s all the usual 30 year vanilla, 15 year fixed rate, prepaid mortgage, nothing fancy.

So, I just don’t see the pressure here resulting in a big, sharp drop in price. But prices have flattened nationally and fallen in a fair market? Yes, I would anticipate that. And I’d say that’s what the Fed wants to see.

Bloomberg

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