Prepare for a recession that hits consumers, squeezes businesses and sends stocks lower, a veteran economist has warned.
“There is a very high probability of a recession,” said Nancy Lazar, chief global economist at Piper Sandler. told WealthTrack in a recent interview.
Lazar, co-founder of Cornerstone Macro and ISI, cited the late impacts of Federal Reserve interest rate hikes and credit drying up as two probable drivers of a slowdown.
“We just think this is a very risky economic environment,” she said. “When banks tighten lending standards and interest rates are clearly higher, there has never been a soft landing. There has always been a hard landing.”
Recessions occur on average 10 quarters after the Fed begins the rate-raising cycle, but they occur up to 16 quarters later, Lazar said. The first rise of this cycle took place in March 2022, which means that eight quarters have already passed.
Lazar pointed to several signs of economic difficulties. She noted that 19 US states – representing 40% of national GDP – saw an increase of at least 0.5 percentage points in their average unemployment rate, measured over three months.
In the past, whenever many states saw a significant increase in unemployment, a national recession would occur, she said.
Government figures to show unemployment rose in 30 states in the 12 months to April. The national unemployment rate was 3.9%, up from 3.4% in April 2023.
Many parts of the economy are “really, really struggling,” Lazar said. She highlighted the FIB investigation of small business sentiment, saying the situation was “very deep in recession territory” and worse now than in the recessions of 1990 and 2001.
Meanwhile, low-income consumers are transaction with slowing wage gains and inflated prices, Lazar said. Their credit card balances have “exploded” and subprime auto delinquencies recently hit a record high, underscoring their financial problems.
“Tipping point”
In contrast, wealthy people are doing quite well, with the value of their stock portfolios and homes near record levels. They've been able to keep their mortgages cheap and largely escape higher rates because they have few high-interest loans, Lazar said.
“We have a very divided economy, an unstable economy,” she added.
As for middle-income consumers, they are “at the tipping point” because if unemployment rises above 4 percent, they could find themselves out of work with huge credit card debt, Lazar said.
Given these warning signs, she predicts that business revenues will decline in the final three months of this year as consumers back off and interest rates fall, fueling layoffs and hitting middle-income households.
Money stash
Lazar also said that a the economic crisis would harm stocks.
“If we have a recession, inflation will slow,” she said. “And if inflation slows, you're going to reduce profit margins. And that creates risks for the stock market.”
If inflation proves stubborn and the Fed is forced to keep rates high, it could exacerbate rising unemployment and deepen economic woes, Lazar said.
“A little cash reserve might not be a bad idea right now,” she said. “I’m not sure in my 40-year career I’ve ever really said that.”