The U.S. economy is headed for a recession and soon, as elevated interest rates, a tight money supply and a general slowing take greater effect, according to Evercore ISI economist Ed Hyman. In fact, he indicated a contraction could start early this year, despite expectations from many on Wall Street that the Federal Reserve could achieve its goal of a soft landing as it continues to battle inflation. “We anticipate economic contraction to touch down in Spring 2024. Our analysis pits seven recession indicators against five signals of economic tenacity, suggesting a nuanced landscape.” Hyman, the head of Evercore ISI’s Economic Research Team, said in a client note Wednesday. Chief among the factors contributing to recession expectations are the lagged effects of higher interest rates. The Fed raised benchmark short-term rates 11 times from March 2022 through July 2023 for a total of 5.25 percentage points, and conventional thinking is that it can take as long as 18 to 24 months before that kind of policy tightening makes its way through the economy. Hyman pointed to multiple recessionary signals, including an inverted Treasury yield curve, with shorter maturities higher than longer-dated securities; a contraction in money supply; and ongoing negative readings from leading economic indicators such as credit conditions, consumer expectations and new manufacturing orders. Mitigating factors include high levels of consumer savings, lingering fiscal stimulus effects and excess liquidity. There’s also the jobs market: Nonfarm payrolls rose by 2.7 million in 2023, which was more than 2 million less than the previous year but still indicative of a solid employment picture. But Hyman sees the unemployment rate rising and hitting as high as 5%. At the same time, corporate earnings are expected to slide by 6%, the result of weaker growth, diminished pricing power and challenges to productivity, which actually has been rising. Adding it all up, Evercore ISI sees GDP going negative in the second and third quarters and rising at just a 0.2% annualized pace for all of 2024. That won’t be welcome news for President Joe Biden, who is running for reelection, and the Fed, which is struggling to steer the economy to safe waters. “History suggests a recession might start in the spring of 2024, and an inversion [of the yield curve] has ALWAYS been followed by a recession,” Hyman wrote. “This has obvious political implications known by both the White House and the Fed.” On the upside, Hyman said inflation is likely to continue to recede, hitting the Fed’s 2% annual target by the end of the year. Despite a generally more optimistic attitude from economists and the Fed heading into 2024, Hyman is not alone in his caution. Deutsche Bank recently warned that the economy faces a dangerous path ahead, and DoubleLine CEO Jeffrey Gundlach on Tuesday repeated his call for a potentially “severe recession” ahead.
Top Wall Street economist Ed Hyman sees a recession this spring
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