The recession October Surprise Will that change the outlook for the election?
Bad news for Kamala Harris: The economy is doing as usual. The biggest issue for voters is And already Rising to 4.2 percent Even a drop from this year's 3.7% would not improve her chances of winning.
That is certainly surprising, because investors and economists today are almost unanimous in saying that we “Soft landing.” The Federal Reserve is expected to continue its efforts to lower interest rates and curb inflation while trying to avoid a recession.
The problem is that it almost never happened.
Even Ed Hyman of ISI Evercore, who has been warning of a recession for more than a year, I threw in the towel.Hyman has been warning of a recession for the past few years, citing an inverted yield curve, declining leading indicators and, of course, rising interest rates.
Hyman is ranked the #1 economist on Wall Street. 43 of the last 48 yearsHe earned this remarkable honor by getting more things right than wrong, and by updating his predictions in response to data coming in. That's what he's doing right now, but he's doing it unwillingly.
Hyman I recently wrote He told clients: “History and experience dictate that we should stick with our hard landing outlook, but the rigorous calculations that our team has verified dictate that we should shift to a soft landing outlook.” But he didn't seem entirely convinced: “To say this is a difficult decision is an understatement. This feels like a bold moment to soft-land.”
Bold, to be sure: The last thing Hyman wants to do is abandon his recession predictions as the economy weakens, but he is reacting to a mountain of data showing that the labor market is softening but not yet collapsing.
Sure, employment is down, job openings are shrinking, workers are feeling pessimistic about finding new work, and the unemployment rate has risen by more than half a percentage point, which is often a sign of an economic downturn. But all the while, consumers are continuing to spend.
Hyman frequently points out that the Fed rarely initiates an interest rate hike cycle without causing a financial crisis, or at least a recession. That may still be true, but this cycle An unprecedented amount The federal government's funding of the COVID mess has been fueled by trillions of dollars of federal funding used to avert a recession, which has boosted personal savings. Unprecedented level That, combined with rising net worth and a strong job market, has fueled consistently better-than-expected consumer spending.
Remember, at the start of 2022, investors were almost unanimously predicting a recession, but thanks to a government spending rush, that never materialized.
But now that cash outpouring is slowing. Consumers remain reluctant to cut back on spending. After all, who wants the party to end? Significant increase For those who are in increasing debt, whose incomes have not increased with inflation, or who suddenly find it difficult to find work, Increase in delinquency.
The FDIC recently reported on credit problems at the nation's banks. Written “Credit card net credit loss rates rose again in the second quarter to the highest rate since the third quarter of 2011,” meaning more people are falling behind on their credit card payments enough that banks are writing off losses than they did during the COVID-19 downturn.
Recent data suggests that the economy is finally starting to slow. The Bureau of Labor Statistics Just 142,000 jobs were added in August, down from a monthly gain of 202,000 last year. To make matters worse, the June and July totals were overestimated by 86,000, lowering June's additions to 118,000 and bringing the revised July total to just 89,000. The August report is likely to be revised downward as well, indicating a significant weakening of the job market.
In addition, the number of full-time employees 1 million decrease Over the past year, the number of part-time workers has increased, but not the number of part-time workers, suggesting that employers are reluctant to hire more full-time workers and that their employment situation is more fragile.
One economist who disagrees with the consensus that a recession could happen before the election is Barry Knapp of Ironside Macroeconomics. He is worried On labor demand for small businesses: The Fed's approach to curbing growth — raising interest rates rather than adjusting its balance sheet — has particularly hurt small businesses, he says. account It accounts for approximately 60% of employment nationwide.
What he says is true. ADP reports on employment Small business employment has stagnated in real terms, growing about 0.1% over the past year, while larger companies have been adding workers more quickly — a disparity borne out by employment trends reported by the National Federation of Independent Business. Latest Research Just 13% of small business owners plan to create new jobs in the next three months, down 2 percentage points from July.
There is also evidence that individuals are finding it harder to find work. Recent Conference Board Reports “While consumers' assessment of their current working conditions remains positive, it continues to weaken and their assessment of the future labor market has become more pessimistic,” the report said. According to the latest JOLTS report: The “job turnover” rate, which measures optimism or pessimism about employment prospects, has fallen significantly over the past year.
Many companies cited weaker demand, especially from lower-income consumers, during second-quarter earnings calls. Overall, consumers Be more cautious.
The Fed meets next week and will likely cut rates by 25 basis points. Many economists are arguing for more cuts, but investors worry that a 50 basis point cut would signal the Fed sees signs of a recession and spook markets. There's a lot at stake, including possibly an election.
Liz PeakeFormer partner at Wertheim & Company, a major Wall Street investment firm.
