Mark Zandi, who has been an economist for more than three decades, says he’s never seen so many people convinced that a recession is imminent.
And while he believes the US economy can still avoid such an economic downturn, sentiment is so poor that it poses its own risk -- a sort of self-fulfilling recession prophecy. Zandi, the chief economist at Moody’s Analytics, joined the “What Goes Up” podcast to discuss his outlook after government data this week showed the highest level of inflation in almost 41 years.
Below are condensed and lightly edited highlights of the conversation. Click here to listen to the entire podcast, and subscribe to “What Goes Up” on Apple Podcasts or wherever you listen.
Q: You have downgraded your GDP outlook for this year and next year. (Zandi now expects real growth of 1% this year and 2% in 2023, versus previous forecasts of 2% and 2.5% respectively.) What is going to happen over the next 18 to 24 months?
A: I still have no recession (in his forecasts). Obviously, recession risks are high -- I mean, clearly, when inflation is so high and the Fed is on DEFCON 1 and rightfully focused on getting that inflation down by jacking up interest rates, and sentiment is miserable, right?
I talk to CEOs, CFOs, investors, friends, family -- to the person, they think we’re going into recession. I’ve never seen anything like it. I’ve seen a lot of business cycles now. And no one predicts recessions. But in this one, everyone is predicting a recession. So when sentiment is so fragile, it’s not going to take a whole lot to push us in. I think with a little bit of luck, and some reasonably good policy-making by the Fed, we’re going to be able to avoid a recession. But I don’t say that with a lot of confidence.
I don’t think we need a recession to get inflation back in. Oil prices are going to roll over. Natural gas prices are going to fall. We’re going to see vehicle prices come down as supply-chain issues iron themselves out and we get more vehicle production. Commodity prices, goods prices more broadly, are going to come in.
Q: When you downgraded your GDP growth outlook, you said odds remain that the economic expansion will continue. What specifically were you thinking there?
A: The thing that I take the most solace in is that, in my mind, the firewall between a continuing growing economy and a recession is the American consumer. If the American consumer hangs tough, just do their part, spend like they’ve always been spending, we’ll avoid a recession. And by the way, if the American consumer hangs tough, they’ll keep the global economy moving forward as well. You know, some parts of the global economy will go in, but the US consumer’s kind of driving the train right now.
And if you look at the American consumer, they’re in pretty good shape. Obviously, they’re getting hammered by the high inflation right now, but they’ve got a lot of excess savings they built up during the pandemic and it’s across all income groups.