A Recession Looms: Economic Expert Warns of Hard Times Ahead
Nancy Lazar, the chief global economist at Piper Sandler, has issued a stark warning about an impending recession that could significantly impact households, businesses, and the stock market. In a recent interview with WealthTrack, Lazar highlighted the high probability of a recession, driven by the delayed effects of the Federal Reserve’s interest rate hikes and tightening credit conditions.
Lazar, who co-founded Cornerstone Macro and ISI, pointed to several critical indicators suggesting that a downturn is almost inevitable. She noted that the economic environment is currently very risky, as banks have begun tightening lending standards in response to higher interest rates. Historically, such conditions have never resulted in a soft economic landing but rather a hard one.
Economic Indicators and Concerns
Lazar’s analysis draws on the historical pattern that recessions typically occur an average of ten quarters after the Federal Reserve begins a rate-hike cycle, though they have arrived as late as sixteen quarters after. Since the first hike of this cycle was in March 2022, eight quarters have already passed, bringing the economy closer to a potential recession.
Several signs of economic trouble are evident. Unemployment has increased in 19 U.S. states, which collectively contribute to 40% of the national GDP. These states have seen at least a 0.5 percentage point rise in their average unemployment rates over the past three months. Lazar emphasized that whenever such a significant increase in joblessness has occurred in numerous states, a nationwide recession has typically followed. Government figures corroborate this, showing that unemployment rose in 30 states over the twelve months leading up to April 2024, with the national unemployment rate climbing to 3.9%, up from 3.4% in April 2023.
In addition to rising unemployment, Lazar highlighted that several parts of the economy are “really, really struggling.” She pointed to the NFIB survey of small business sentiment, which shows levels deeply entrenched in recession territory, worse even than during the recessions of 1990 and 2001. This indicates significant economic distress among small businesses, which are often seen as the backbone of the U.S. economy.
Bifurcated Economy
Lazar described the current economic situation as highly uneven, creating a bifurcated economy. On one end, wealthy individuals continue to benefit from high stock portfolio values and stable housing markets. These individuals have largely avoided the financial impact of rising interest rates due to their low-debt profiles and ability to secure cheap mortgages before rates increased.
In stark contrast, lower-income consumers are facing severe financial difficulties. They are contending with slowing wage gains and rising prices, which are squeezing their budgets. Credit card balances have reached unprecedented highs, and subprime auto loan delinquencies have set new records, underscoring the financial instability faced by this demographic.
Middle-income consumers find themselves at a critical juncture. According to Lazar, they are “at the tipping point.” If unemployment climbs above 4%, many middle-income individuals could lose their jobs, leaving them with substantial credit card debt and little means to manage it.
Corporate and Market Implications
Lazar predicts that corporate revenues will weaken by the end of the year as consumer spending pulls back and higher interest rates take their toll. This decline in consumer spending will likely lead to layoffs, exacerbating the financial challenges for middle-income households and further straining the economy.
The stock market is not immune to these economic pressures. Lazar cautioned that a recession would likely squeeze corporate profit margins, posing substantial risks to the stock market. Should inflation remain high and compel the Federal Reserve to maintain elevated interest rates, the resulting economic downturn could be severe.
Strategic Advice
In light of these risks, Lazar advises individuals to consider holding cash reserves. “A little stash of cash may not be a bad idea right now,” she suggested. This advice reflects her extensive career in economic analysis and forecasting, indicating the importance of preparedness and caution in uncertain economic times.
Conclusion
Nancy Lazar’s analysis paints a concerning picture of the U.S. economy, marked by rising unemployment, tightening credit conditions, and significant financial strain on consumers and businesses. As the economy navigates these turbulent times, her insights underscore the importance of preparedness and caution for both individuals and companies. The warning signs are clear: a recession may be on the horizon, and taking proactive steps now could mitigate some of the potential impacts.