Experts Warn Of Recession, But Maintain Hope

Financial experts calling for a recession has become a running theme in recent weeks. They may not agree on when it may occur, but a pullback is figuring into most analysts’ outlooks for the next 18 months.  

The high-profile ranks include JPMorgan Chase CEO Jamie Dimon; Grantham, Mayo, & van Otterloo Long-Term Chief Investment Strategist Jeremy Grantham; and Tesla CEO Elon Musk.  

Dimon, in particular, described the future economic environment as a “hurricane” bearing down on the U.S. economy, in a recent CNBC interview, saying the U.S. economy had 66% odds of a recession or something more extreme. 

But some key figures are taking a slightly more moderate tone.  

Mohamed El-Erian, Allianz’s chief economist, is one of the voices warning of recession but he’s not saying it’s inevitable. He has been vocal in his disappointment with the Federal Reserve’s lack of action, however.  

“[The Federal Reserve] mischaracterized what inflation is. And then it fell behind. The lesson of history is that once you fall behind, you lose the ability of the first best response,” he said on CBS’ Face the Nation, adding, “Do you slam on the brakes hard to control inflation and risk a recession, or do you just step on the brakes and risk inflation lasting much longer than it should?” 

He opined on Sunday that the U.S. was experiencing stagflation, with the strong labor market standing between the country and recession. El-Erian also said that he expected a 50 basis point rate hike from the Fed on Wednesday, though yesterday, the Wall Street Journal and two major investment banks—JP Morgan and Goldman Sachs—said a 75 basis point hike was likely. El-Erian tweeted this morning that the “curse of excessive specificity” had hit the Fed again.  

Robert Shiller 

Robert Shiller, Sterling Professor of Economics at Yale and creator of the CAPE ratio, is another voice warning of the possibility of recession, but he is placing the odds at 50%, which he said is much higher than normal, according to Bloomberg. He also raised the idea that a recession could become a self-fulfilling prophecy, as the population—from consumers to CEOs—become more fearful, causing them to take a more pessimistic stance.  

He cited such contributing factors as the possible housing bubble and rising inflation as possible contributors, not to mention widespread emotional blowback from a pandemic that cause 1 million deaths in the U.S. alone.  

WealthManagement.com also reported Shiller indicated he did not think current Fed Chair Jerome Powell had the same level of resolve to tame inflation and face the resulting negative consequences that Paul Volcker did. 

Nouriel Roubini 

Nouriel Roubini, Professor Emeritus of Economics at New York University’s Stern School of Business and chief economist at Atlas Capital Team, is known as Dr. Doom for his often pessimistic outlook on markets, remains skeptical of a positive outcome or a “soft landing.”  

He put the odds of a hard landing at 60% in a recent column for Project Syndicate due to the need for aggressive quantitative tightening, which has the potential to cause a crash in markets and/or the economy. However, if central banks “wimp out,” he believes stagflation will be the outcome.  

Roubini stops short of speaking in absolutes, but he believes that with a soft landing being “highly improbable,” a hard landing—which allows for lower inflation—or a stagflationary environment will lead to recession within the next two years.  

Jeremy Siegel  

Jeremy Siegel is an economist and professor of finance at Wharton. He told CNBC’s Halftime Report last week that the S&P 500 likely had already priced in a mild recession and that the market was “closer to the lows than the highs.”  

Halftime Report participant Josh Brown pointed out that, historically, the market has gone down 31% during a recession on average, but Siegel countered that the historical averages were distorted by severe recessions in the past, and that interest rates, despite the rising rate environment, were still far lower than the historical average.  

The U.S. stock market tipped into bear territory the trading day after he made his assertions.  

Contact Heather Bell at [email protected]