Fed rate hikes have already confused the housing market, with a 30-year fixed mortgage rate more than doubling this year to about 7%, and will increasingly dampen auto purchases, credit card use and business investment. say Schwartz and LaVorgna.
In addition, LaVorgna says, the Fed is raising interest rates for the first time even as the economy slows sharply.
“If they do what they say they’re going to do, we’re going to have a deep recession,” LaVorgna says, adding that he believes Fed officials will change course before that happens.
The number of job openings has fallen from a near-record 11.2 million in July to a still robust 10.1 million the following month. Due to persistent labor shortages, many companies are hesitant to lay off workers or cut headcount sharply for fear they won’t be able to find workers when the economy picks up again.
Normally, a resilient labor market helps protect an economy from a recession. But now it will likely urge the Fed to continue raising rates aggressively to dampen wage increases that have fueled inflation. That could increase the risk of a deeper downturn
“They’re trying to take steam out of the job market without triggering a recession,” Bryson says. “That’s very hard to do.”
A Deutsche Bank study published this week says the Fed will need to raise its policy rate enough to bring unemployment near 6% by the end of 2024 to keep inflation close to its 2% target. bring.
Will house prices fall in 2023?
Existing home sales fell in September for the eighth month in a row. According to the Federal Housing Finance Agency’s House Price Index, house prices fell for the second time in a row in August.
Housing, mostly through new construction, makes up just 4.6% of the economy, Schwartz says, adding that he’s not worried the sector is contributing to a severe recession. Moreover, the market does not look like it did in 2007, when banks distributed millions of subprime loans to unqualified borrowers, leading to massive foreclosures and layoffs.
But Gregory Daco, chief economist at EY-Parthenon, says housing wealth accounts for about half of total household wealth. He expects house prices to rise by 6% by mid-2023.
“Rapidly falling prices could dampen household consumption and increase the recession dynamics expected to dominate the economy in 2023,” Daco wrote in a note to customers.
Could a deep recession in Europe spill over to the US?
Goldman Sachs now expects the winter weather to trigger a more severe European downturn, one brought on by rising energy prices linked to Russia’s war with Ukraine.
S&P 500 companies derive about 14% of their revenue from sales in Europe, according to FactSet. Bryson fears a deeper downturn could further erode the prospects and investments of US companies.
