‘Very High’ Odds of Downturn Amid Job, Spending Risks

Estimated read time 3 min read
  • The odds of a recession are “very high” in the US, according to Joe LaVorgna.
  • The chief economist of SMBC Nikko pointed to a number recession warnings flashing in the economy.
  • Unemployment could spike and consumer spending could drop off, LaVorgna said in a webcast.

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The odds of the economy tipping into a recession are “very high,” as the US is poised to see a wave of unemployment and a major drop in consumer spending.

That’s according to Joe LaVorgna, the chief economist of SMBC Nikko Securities who’s among the few on Wall Street still sounding the alarm about the risk of a coming recession, as forecasters adjust their outlook amid a strong economy and resilient labor market. 

But a no-landing scenario is a “silly” concept to even think of, LaVorgna said in a recent webcast with Rosenberg Research, estimating that the odds of a recession are between 49%-51%.

Recession indicators that have predicted previous downturns have already flashed a warning. The Conference Board’s Leading Economic Index suggests there will be “near-to-zero” GDP growth over the second and third quarters, the group said in a recent statement. The closely watched 2-10 Treasury yield curve also remains inverted, while bank lending has contracted in recent months.

“All three of those metrics are still flashing recession,” LaVorgna said. 

The labor market could also be poised to weaken, especially within the residential real estate market. The construction sector is over-employed by roughly a million workers, LaVorgna estimated, which could spark a wave of job losses as housing activity doesn’t pick up. 

The impact of construction layoffs alone could push the overall unemployment rate up by 60-70 basis points, he predicted.

“If rates don’t come down very dramatically, very quickly, my guess is that we’re going to lose a significant amount of construction employment,” he warned. “Is it possible the Fed cuts rates very dramatically? Yes. But that’s only going to happen or most likely going to happen if there’s a recession.”

Strong consumer spending on goods also looks poised to drop, which could end up dragging economic growth lower, LaVorgna said. That’s because Americans aren’t likely to keep up their rapid pace of spending, thanks to higher borrowing costs and depleted excess savings they accumulated during the pandemic. 

“It makes me think recession risk … still has a very high probability,” he added. 

That risk doesn’t seem as apparent to investors, who are generally feeling bullish on stocks and the economy over the coming year. 46% of investors said they felt bullish on stocks for the next six months, according to the AAII’s latest Investor Sentiment Survey. Economic optimism also rose to its highest level in two years in January, according to Gallup’s latest Economic Confidence Index survey.