Last year, as analysts speculated on the trajectory of the U.S. economy, prevailing consensus suggested an impending recession. However, the anticipated downturn failed to materialize, defying expectations. Fast forward to this year, where the consensus forecast paints a picture of a “soft landing,” characterized by a gradual economic slowdown without plunging into recessionary territory. Yet, in a departure from this mainstream view, Citi’s chief U.S. economist, Andrew Hollenhorst, has taken a contrarian stance, projecting a scenario of a “hard landing” for the economy.
Hollenhorst’s assessment stands out for its stark forecast: he foresees a significant economic slowdown, driven by inflationary pressures and weakness in the labor market. He contends that these challenges will prompt the Federal Reserve to enact a series of interest rate cuts, a far more aggressive response compared to the more conservative predictions of one or two cuts anticipated by Wall Street analysts.
The credibility of Hollenhorst’s forecast received validation when the Labor Department’s payroll report for April revealed a notable deceleration in job growth. The addition of only 175,000 jobs in April, compared to March’s robust increase of 315,000, fell significantly short of economists’ expectations.
Hollenhorst’s warning is underscored by various indicators signaling labor market weakness. Surveys have indicated growing challenges in finding employment opportunities, a diminished appetite for hiring among businesses, and heightened job insecurity among workers. Despite recent mixed economic data, with some indicators suggesting a resilient job market while others hint at cooling economic growth, Hollenhorst remains resolute in his belief that a soft landing is unlikely.
He emphasizes that the Fed may not wait for both inflation and labor market indicators to worsen before taking action. Even a decline in one of these areas could prompt rate cuts, according to Hollenhorst’s analysis. His perspective suggests that monetary policy often follows a pattern where initial reluctance to lower interest rates gives way to eventual rate cuts as economic conditions deteriorate.
Back in February, Hollenhorst had already been sounding the alarm about the potential for a hard landing. He raised concerns about indicators such as declining hours worked and a reduction in full-time employment, which hinted at underlying weaknesses in the labor market.
Hollenhorst’s contrarian view serves as a reminder of the complexities and uncertainties inherent in economic forecasting. It underscores the potential impact of policy decisions on market dynamics and highlights the importance of considering alternative scenarios in navigating economic uncertainties.