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Leading economist expects 'slowcession' instead of recession

FILE - Shoppers wait in lines to check out at a Ralphs supermarket on March 13, 2020, in the Panorama City section of Los Angeles. (AP Photo/Richard Vogel, File)
FILE - Shoppers wait in lines to check out at a Ralphs supermarket on March 13, 2020, in the Panorama City section of Los Angeles. (AP Photo/Richard Vogel, File)
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A leading economist is forecasting a "slowcession" instead of a recession in the next year or year and a half.

But that economist also gives us a 50/50 shot at falling into a recession.

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No matter what technically happens, Moody’s Analytics Chief Economist Mark Zandi said economic conditions will feel “uncomfortable” to people.

“There's a lot of risk given the high inflation and the Federal Reserve’s very aggressive efforts in raising rates to try to quell that inflation. But, you know, if I had to pick a side, recession, no recession, I think there's a good fighting chance that we'll get through the next 12-18 months without an outright recession,” Zandi said.

He said it’ll take some luck and deft decision-making by the Federal Reserve on interest rates.

So, what is a "slowcession"?

That description was coined by Moody’s Analytics Deputy Chief Economist Cristian deRitis.

Zandi said it would mean much slower growth – growth that comes to a near standstill but that never slips into reverse, as he put it in a newly released analysis.

It would not include the broad and persistent decline in economic activity that defines a recession.

Zandi said that if we suffer the kind of typical recession we’ve seen since World War II, we’re looking at it lasting about 10 months. And, given the current size of the labor force, we'd lose about 4 million jobs. Unemployment, currently 3.7%, would probably get as high as 6%.

“Recession is pretty painful. I don't expect that. I expect a ‘slowcession,’” he said.

The economy’s fundamentals are strong. That could be our saving grace.

We don’t have the significant imbalances in the economy that we often see before recessions, he said.

Our economy is not suffering from overleveraged households and businesses, speculative asset markets, an undercapitalized financial system that has extended too much credit, overbuilt real estate markets, or financially stretched state and local governments, he said.

This recession, if it were to happen, would be primarily driven by high inflation and rising rates.

But expectations of a recession could overshadow all the good economic fundamentals, he said.

“A recession is a loss of faith,” Zandi said.

If consumers lose faith and pull back enough on spending, or if business owners lose faith and start laying off more workers, then a recession could be a self-fulfilling prophecy.

Economic sentiment is fragile, he said. Everyone's nervous.

That pessimism is a real danger, and trying to gauge human behavior is very difficult.

“You get into this kind of self-reinforcing, negative, vicious cycle,” he said.

Zandi highlighted two keys to staving off a recession.

The first is keeping layoffs low.

The Bureau of Labor Statistics released new data Wednesday on job openings and labor turnover, and it shows layoffs in November coming in at a little over 1.3 million.

“That's pretty close to a record low,” he said. “In a kind of a typical economy, it's closer to not quite 2 million every month.”

The other is continued resilience from consumers and businesses. Zandi noted strong holiday sales.

He expects a couple more rate increases from the Fed.

The Federal Funds Rate, the rate at which banks lend to each other, currently sits at 4.33%, and a 30-year fixed mortgage sits at around 6.42%.

Zandi said the financial markets expect the Federal Funds Rate to hit around 5% in the next several months, and that’s where he thinks the Fed should pause and take stock of how jobs and inflation are responding.

He thinks the Fed could get good inflation news and that would be that, with inflation getting “back in the bottle” by spring or summer 2024.

He also offered some advice to households: Don’t make any drastic changes, but be prudent.

Don’t take on a lot of debt, especially high-interest credit card debt, and watch spending on big-ticket items like cars or home renovations.

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“Broadly speaking, I would say do what you typically do. Don't spend with abandon, don't borrow money, a lot of money. But just do what you typically do. And I think the economy will be fine, and you will be fine,” Zandi said.

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