Economist: Recession’s ‘litmus test’ has finally arrived

Traders are hearing a lot of predictions that a recession will occur in 2022 and 2023. Spencer Pratt/Getty Images

As the United States faces a series of economic headwinds, from union strikes and student loan payments to rising oil prices and sky-high mortgage rates, economist David Rosenberg I think a recession is almost certain.

Of course, the president of Rosenberg Research, a market analysis and investment strategy firm, has been predicting an economic downturn for some time. In March 2022, shortly after the Fed began raising interest rates to combat rising inflation, he warned there was a 75% chance the U.S. would fall into recession by the end of the year.

Although this judgment turned out to be premature, the veteran economist still won’t abandon his bearish outlook, even though some of his colleagues and Fed staff have already done so.

“It hasn’t happened yet, it’s patchy,” he said Wednesday when asked about his predictions on CNBC, adding that despite more rosy predictions from his peers, the economy is likely to go into recession within the next six months. He emphasized that he now believes that the future will come.

“If it doesn’t snow in December, it’s like the winter is over,” he quipped.

Rosenberg expects consumers to start reducing spending dramatically in the fourth quarter, especially as gas prices climb toward $100 a barrel, a period he calls He calls it a “litmus test” for declaring a recession.

Does it feel like 2008 again?

Rosenberg pointed to the long and volatile lag that affects the economy when interest rates rise, noting that central bank policy tends to weigh on the economy for years before something finally breaks down. .

“Historically, there’s usually two years between the first rate hike by the Fed and the start of a recession,” he said, arguing that recession forecasters like himself are “a little too impatient.”

Rosenberg said U.S. consumers have fared better than expected over the past two years, helping to insulate the economy from recession for two main reasons. First, the “prolonged fiscal stimulus” of direct consumer payments and small business loans during the pandemic means that consumers are not feeling the full impact of inflation. Second, there is a “consumer credit card boom” that has stimulated consumption.

He noted that U.S. consumers’ credit card balances rose by $45 billion in the second quarter to a record $1.03 trillion due to inflation, according to data from the New York Fed. .

But Rosenberg argued that consumers cannot rely on credit cards forever and will be forced to rein in their spending as the effects of fiscal stimulus wear off. Next year, the $1.2 trillion Infrastructure Investment and Jobs Act and the $280 billion CHIPS Act are supposed to boost industrial and manufacturing industries, but they will not be as strong as the consumer-focused stimulus packages that occurred during the pandemic. There will be no impact, Rosenberg said. . He noted that the industrial and manufacturing sectors of the U.S. economy account for only a small portion of gross domestic product (GDP), with consumer spending accounting for 70% of that.

“The point is not what the CHIPS Act and all the other industrial subsidies and government interventions do to the business cycle. What is important is what happens to consumers now that those fiscal wheels are coming off. will happen,” he added.

Rosenberg highlighted the experience before the Great Recession of 2008 in maintaining a bearish outlook despite more positive economic indicators over the past year. “It reminds me of when I was calling for a recession in 2007,” he said. He pointed out that although they were criticized at the time, they turned out to be correct.

Of course, Rosenberg was also “99% sure” that a recession would hit in 2012, but that didn’t happen.