By Andy Owens
Business owners should expect a recession to hit the U.S. economy in the first half of 2024, a Daniel Island economist said during an annual economic forecast in December.
Stephen Slifer, a former chief economist for Lehman Brothers and former senior economist for the Federal Reserve, told hundreds of business owners, professionals and government officials in Charleston that the national economy continues to remain strong even with rising inflation fears and a looming recession.
“The stock market has gotten whacked pretty good this year,” he said. “Yet, the economy keeps hanging in there.”
If a recession does come in 2024, businesses could experience a recovery during the second half of that year, he said.
Slifer, who writes a column for SC Biz publications and operates a data analytics firm in Charleston, said several indicators that economists watch are predicting a recession.
“When are we expecting some sort of a recession?” Slifer said. “I don’t want to oversimplify this, but there’s a couple of things that I’m looking at. There's all sorts of leading indicators.”
Slifer said the real funds rate and the yield curve, along with specific federal policy changes, give economists a reason to think a recession will occur in 2024.
The real funds rate is essentially the real interest rate with a subtraction for inflation, which indicates the actual cost of borrowing money and what a lender might expect as a return for lending money. Along with the real funds rate, Slifer said economists also look for an inverted yield curve.
“It’s just the difference between long rates and short rates,” Slifer said. “Usually, long rates are higher than short rates, so the thing slopes upward. But then the Fed comes along and they start raising rates up, up, up, up, up, go short rates. Eventually short rates get to be higher than long rates and now the curve shows slopes downward. That’s known as an inverted yield curve.”
Slifer said that an inverted yield curve is typically a sign that Fed policy has become “too tight.” He said historically, going back about 50 years, when economists detect an inverted yield curve, a recession is about one year away.
“So both of my warning signals are telling me that something is going to happen by the middle of next year, so for that reason I’m looking for a recession in the first half of 2024,” Slifer said, adding, “No recession for now, but I think it’s inevitable.”
In a year that saw continually rising interest rates, inflation, a battered stock market and late-year massive layoffs, particularly in the tech sector, Slifer’s annual economic forecast sold out.
With several questions coming about federal policy, student loan forgiveness and the status of entitlements such as Medicare, Medicaid, Social Security, federal pensions, including veterans’ benefits, he said the U.S. needs to do better with its monetary policy, including finding the political will to deal with looming insolvency issues with some of those programs. He said the Obama Administration had a possible plan in hand that could have tackled these issues but decided against going forward. He said given the division in Washington, it’s unlikely any lawmakers would have the will to take on such thorny, difficult and costly issues.
Slifer said the status of the economy, with ever rising inflation but not a residual reduction in spending, can be found in the data and monetary policy decisions. Because inflation is tied to the real funds rate as an indicator of a recession, understanding how to navigate and mitigate that could become critical to emerging from an economic downturn.
“The last couple of years, I think that fiscal and monetary policy that we’ve got in this country has gone seriously off track,” Slifer said.
He said our current monetary issues can be traced back to a government overreaction beginning in March and April 2020 with shutdowns related to the COVID-19 pandemic and gross domestic product dropping 30% for the quarter.
“In dollar terms, that’s about $2.1 trillion, right? And yet it wasn’t consumers, it wasn’t businesspeople that did any of that. This was on the government. They did it,” Slifer said, referring to the shutdowns. “I think they felt a responsibility to make people whole.”
Slifer said that the first stimulus of $2 trillion might have made sense, but the money kept coming with stimulus payments coming to businesses and individuals, in addition to the federal government buying debt.
By the time the stimulus packages had ended, the $2 trillion in economic aid had nearly quintupled. He said a lot of people likely paid down debt, giving them the ability to spend more now, which has resulted in a strong economy even with rising inflation based on consumer spending and a willingness to go into debt.
“Add it all up, we had $9.5 trillion worth of stimulus for Pete’s Sake,” Slifer said. “We were trying to solve a $2 trillion problem. That just seems like gross overkill to me, and we’re sitting here wondering … ‘I wonder why inflation is so high.’ Well, here’s a start.”
Slifer also said the Fed underestimated the depth and causes of inflation. He said when he was at the Federal Reserve, politics did not figure into Fed policy, and he’s reluctant to say that has been happening now. He said instead he wanted to think it was just a miscalculation based on circumstances that were difficult to predict.
Slifer said the Fed thought inflation initially was just temporary, and said inflation was simply a result of supply disruptions and other things that had taken place during the pandemic. He said they just expected inflation to go away.
“They stuck to that theme for a year and a half,” he said. “They didn’t give up until December of last year, and then they finally said, ‘Uh, oh, you know this inflation is just not as temporary as what we thought. We’ve got a problem here, and by the way, we’re way behind the curve and we’re going to start raising rates.’ The Fed, in my view, was about 18 months too late. That’s a long time.”
Being slow to react to inflation and an overreaction with stimulus payments going through March 2021, even though the pandemic recession ended in April 2020, has had a ripple effect that impacts inflation, fiscal policy, real estate and investments along with difficulties in the labor market, Slifer said.
“It absolutely was totally unnecessary in my view,” Slifer said. “There are consequences to that stuff. That’s why we’re sitting here looking at these really high inflation rates, interest rates have risen dramatically, (and) government debt has exploded.”
One audience member asked if the Charleston area might be somewhat “insulated” from the recession he predicts a year from now considering that the region typically does not to fall as far and bounces back faster than other areas during economic downturns.
Slifer said with the strength of the housing market at different price points and the demographics of the many people who continue to move into the market, he does not expect to see the decline in housing, GDP, and the labor markets that other areas might experience. But he said while there might be a diminished impact for the Charleston region, he said he would not use the word “insulated.”
“Are we going to be insulated and not see (home) prices drop? I don’t think so,” he said, adding, “We are not insulated. We’re going to move in the same direction, but I guess with a lesser degree.”