Economists Mark Zandi and Cris deRitis discuss the surprising resilience of the US economy in 2023, with fading recession risks but slow growth. They delve into topics such as inflation, commercial real estate collapse, geopolitical risks, corporate interest expense, social unrest, and the potential for a cyber attack on the payment system.
Geopolitical risks and supply chain disruptions could lead to higher oil prices and a potential recession.
Mistakes in the Federal Reserve's monetary policy decisions may impact economic growth and inflation control.
The commercial real estate market faces risks due to evolving work-from-home trends, but the severity may not be as high as initially feared.
Deep dives
Geopolitical Risks and the Impact on Oil Prices
One of the main concerns discussed in the podcast is the potential impact of geopolitical risks on oil prices and the economy. The podcast explores various conflict scenarios, such as the tensions between Israel and Hamas, as well as concerns regarding Russia's invasion of Ukraine. The main focus is on how these conflicts could lead to higher oil prices and disruptions in global supply chains. It is noted that higher oil prices could have negative consequences for the US economy, particularly in terms of consumer spending and inflation. While the baseline forecast suggests a gradual decline in oil prices, the podcast highlights an alternative scenario (S6) where geopolitical events and supply chain disruptions lead to a recession and higher inflation.
The Federal Reserve and the Risk of Mistakes
The podcast also discusses the potential risk of the Federal Reserve making mistakes in its monetary policy decisions. While acknowledging the Fed's efforts to balance the need for raising interest rates to control inflation, there is a concern that the Fed may be too slow or too conservative in its approach, which could impact economic growth. The podcast emphasizes the complexity of the Fed's task in managing inflation expectations, financial conditions, and other factors. The concern is that if the Fed misjudges the economic conditions, it could lead to policy actions that either restrain growth too much or fail to control inflation effectively.
Commercial Real Estate Risks
Another area of focus in the podcast is the potential risks in the commercial real estate market. The discussion highlights the impact of evolving work-from-home trends and changes in office space demand on commercial real estate prices. While there are concerns about potential price declines, the podcast also notes that the risks may not be as severe as initially feared. The discussion emphasizes the heterogeneity within the commercial real estate market, with different property types and markets experiencing varying levels of risk. The podcast also mentions the potential impact on lenders and the need for continued monitoring of the commercial real estate market.
Banking System Concerns
The podcast addresses concerns regarding the stability of the banking system. It highlights the recent example of the SBB crisis and the risks associated with bank failures and bank runs. While acknowledging that the banking system has taken steps to mitigate risks, there is still a recognition of the potential impact on the broader financial system and the economy. The discussion emphasizes the need for ongoing monitoring and safeguards to prevent a potential banking system crisis.
Financial System Challenges and Vulnerabilities
The banking system and non-bank financial system are facing significant challenges and operating in a tough environment. The inverted yield curve and high short-term interest rates are intensifying competition for deposits, as retail money market funds have seen a significant increase in cash deposits, making it difficult for banks to manage their deposits and liabilities. Lending growth is slowing due to tightened underwriting standards and weakening credit quality in both commercial and consumer lending. Smaller banks with high exposure to commercial real estate (CRE) are particularly vulnerable to a weakening underwriting environment, which could lead to delinquencies and defaults.
Social and Political Unrest as a Risk Factor
Social and political unrest is a growing risk, driven by divisions and polarization. Recent events like the COVID-19 pandemic, the 2020 election, and the Black Lives Matter movement have contributed to social unrest. The upcoming 2024 election, which could potentially be between Donald Trump and Joe Biden, is expected to create significant anxiety and uncertainty, especially among the losing side. Political divisiveness and lack of effective leadership could lead to a government paralysis, hindering the ability to address long-term fiscal challenges and potentially leading to a constitutional crisis. This risk is considered more likely to happen and could have serious implications for the economy and government functionality.
The U.S. economy surprised to the upside in 2023 as consumers shrugged off a number of headwinds. With inflation abating and the Federal Reserve facing less pressure to hike interest rates, recession risks are fading. But they can’t be fully discounted given high interest rates, geopolitical turmoil, declining savings, and political uncertainty. Slower growth with somewhat higher unemployment is the most likely outcome. Call it a slowcession.
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Get the Snipd podcast app
Unlock the knowledge in podcasts with the podcast player of the future.
AI-powered podcast player
Listen to all your favourite podcasts with AI-powered features
Discover highlights
Listen to the best highlights from the podcasts you love and dive into the full episode
Save any moment
Hear something you like? Tap your headphones to save it with AI-generated key takeaways
Share & Export
Send highlights to Twitter, WhatsApp or export them to Notion, Readwise & more
AI-powered podcast player
Listen to all your favourite podcasts with AI-powered features
Discover highlights
Listen to the best highlights from the podcasts you love and dive into the full episode
