Northwestern Mutual Wealth Management Chief Investment Officer Brent Schutte and Prosper Trading Academy CEO Scott Bauer assess the stock investing picture in The Claman Countdown.
Is the US currently in or heading into a recession?
That question worries many economists as the nation faces the twin threats of high inflation and the Federal Reserve’s most aggressive rate hike campaign since the 1980s.
There is no easy answer. The economy sends a confusing and conflicting mix of messages about their health. The job market is booming, and the unemployment rate has recently fallen to its lowest level since May 1969. Consumers continue to spend, albeit at an admittedly slower pace than in early 2022. In addition, gross domestic product — the broadest measure of goods and services produced in the country — grew at an annual rate of 2.9% in the fourth quarter.
At the same time, manufacturing has almost certainly entered a recession, house prices are collapsing as sales plummet and tech layoffs mount by the week.
INFLATION STILL EXCEEDS WAGES IN MOST US CITIES
Now a new name is circulating for this confusing post-pandemic economy: a rolling recession. Coined by Loyola Marymount University economics professor Sung Won Sohn, a rolling recession describes a hybrid economy in which industries and sectors essentially contract in turn, rather than contracting all at once.
Housing starts fell in December for the fourth straight month, falling for the first time for the year since 2009. (Yuvraj Khanna/Bloomberg via Getty Images/Getty Images)
“In this situation, we will never see a macroeconomic recession,” Sohn told FOX Business. “But we take turns doing it. All suffer. But a general recession is not coming.”
According to Sohn, one reason for the so-called rolling recession is that people and companies are reacting to tighter monetary policy much more quickly than they used to. With easy access to information online and the Fed’s transparency in its rate-hike campaign, “we know immediately what’s happening and what’s going to happen. And we act in advance,” he said.
A good example of this phenomenon is the housing market, which is the most vulnerable to high interest rates. Even before the Fed began raising rates, individuals and businesses began refinancing their loans in anticipation of higher borrowing costs. For example, housing starts in December fell for the fourth straight month and declined for the first time for the year since 2009.
THE US ECONOMY COULD SEE A ‘CHAPTER SECOND’ IN PANDEMIC PRICE SWING
The sector has shown signs of a revival as mortgage rates fell from a peak of 7.08% recorded late last year.
Nearly all retail categories — including auto, furniture and personal care stores — saw declines over the past month. (STEFANI REYNOLDS/AFP via Getty Images/Getty Images)
Sohn now believes consumers are in a recession, evidenced by the 1.1% fall in retail sales in January, the largest monthly decline since December 2021. Nearly all categories — including auto, furniture and personal care stores — posted a decline over the past month.
He anticipates that corporate spending on inventory and capital expenditure will be down next.
Recessions are typically defined by two consecutive quarters of negative economic growth and are characterized by high unemployment, low or negative GDP growth, falling incomes and declining retail sales, according to the National Bureau of Economic Research, the official arbiter of downturns.
It requires that a recession involves a “substantial decline in economic activity that is widespread across the economy and lasts longer than a few months”.
FED’S POWELL SAYS BLOWOUT JOBS REPORT SHOWS FIGHT INFLATION HAS A WAY TO GO
Rising interest rates usually result in higher borrowing rates for consumers and businesses, which slows the economy by forcing employers to cut spending. Mortgage rates have more than doubled from a year ago, while some credit card issuers have raised rates to 20%.
Federal Reserve Chairman Jerome Powell arrives to speak during a news conference following a meeting of the Federal Open Market Committee September 21, 2022 in Washington, DC. (Sarah Silbiger/Bloomberg via Getty Images/Getty Images)
According to Sohn, there is still a risk that the nation will stumble into an overall economic recession. The Fed has already raised the federal funds rate eight times in a row from near zero to a range of 4.5% to 4.75% in March 2022, signaling that there are “a few more” rate hikes on the table this year.
Markets expect the Fed to hike rates at least twice more, though bets of a higher peak rate are mounting after January’s surprisingly strong jobs report. Several Fed officials have hinted this week that if the strong economy continues, they may have to hike rates more than previously expected.
CLICK HERE TO READ MORE ABOUT FOX BUSINESS
This could exacerbate the financial woes for millions of US households as borrowing costs rise higher, creating more stock market volatility and potentially pushing the economy into recession.
“I think the central bank has done a good job of slowing down the economy and inflation,” Sohn said. “And I think it’s time to stop and then wait. If, as chairman, they continue to raise the interest rate [Jerome] Powell predicts there could be a real, macroeconomic recession. That would be kind of a double whammy. All of these individual industries are in or in a recession. A central bank overreaction could push us all collectively into a deeper recession, and we should avoid that.”