Recession Forecast, ‘Gaslighting’ by the Fed & More

LONG BEACH, Calif.–A recession is coming, but it’s not going to be bad and will likely be short-lived, according to one economist.

Elliott Eisenberg, a frequent speaker to credit union events who heads the consultancy Graphs and Laughs!,  told NAFCU’s annual conference there is ample evidence from history and in the recent historical economic trends that show the second half of 2023 is going to be weaker.

Elliott Eisenberg

Among the reasons and indicators cited by Eisenberg:

Automobiles

“Under normal conditions, automobiles give you a really good signal about the economy. Not now. Interest rates went up, and car sales went up. Now car sales are coming down. Residual values are going to continue to fall,” said Eisenberg.

Household Net Worth

“Household net worth is going nowhere right now,” Eisenberg stated. “The stock market has gone nowhere in 18 months; it’s only doing better due to a few stocks. Housing prices are going nowhere. It’s hard to have a great economy when no one is really making money.”

Savings Rates & Credit Cards

“Unemployment is very low, yet we’re not feeling confident enough to save any money,” Eisenberg said. “Credit card use is way up.  We are adding to revolving balances more quickly and rates are higher. This is a bit worrying. We’re using our credit cards to support spending. That’s not a good sign. Our incomes have not kept up with inflation for the last two years. Real per capital disposable income is $536 above the pre-COVID period. By the end of 2022, people were out of the extra money.

Inflation/Deflation

According to Eisenberg, the Federal Reserve doesn’t care about costs coming down, it cares about residual inflation.

“There are good deflationary factors at work. Manufacturing is in recession, but it isn’t large enough to drive the country into a recession by itself,” said Eisenberg. But services, which is where the majority of Americans spend their funds, is where there are “scarier” numbers, according to Eisenberg. The sector has seen some declines and if those extend that will drive a recession, he said.

The Economic Headwinds

Surveys and data show small businesses lack confidence and are not making investments, according to Eisenberg

“There are a lot of headwinds,” said Eisenberg, but the biggest indicator is the Conference Board Leading Economic Indicators, which strongly indicate a recession is pending.

Other headwinds cited by Eisenberg include a lack of capital expenditures by businesses and more debt is becoming delinquent.

In addition, fiscal policy, after being widely expansionary, will again be contractionary of the next few quarters, Eisenberg predicted.

The Yield Curve

As every credit union is aware, the yield curve is inverted.

“Every time that happens you get a recession,” Eisenberg said, admitting he is also “a bit guilty” of having predicted the economy would be in recession by now. “Recessions typically begin a year after the inversion, and it became inverted last July. So, we’re getting there. But we didn’t factor in the extra (consumer) demand and excess savings.”

Labor Market

“Unemployment being low in and of itself makes me nervous,” said Eisenberg. “When unemployment gets low, the Fed raises rates.”

Eisenberg noted data show the average work week has been declining, with the most recent numbers showing a decline of six minutes per week. While that may not seem like much, Eisenberg said that is the equivalent of 400,000 workers.

“It’s gotten easier to get employees, so companies are saying ‘Let’s hire and train them.’ Companies are afraid to fire workers prematurely. If more are workers hired, it leads to inflation and the Fed will raise rates.”

Housing

“The housing story is one of inventory--there is no inventory. There has been an 80% decline in inventory,” said Eisenberg. “People who got mortgages at 2.7% are not going to move out now. We’ve had this huge increase in interest rates. That keeps prices up. House prices fell year over year—but by seven-tenths of a point! The mortgage purchase market isn’t crashing, it’s crashed. And, of course, refi activity has sunk.”

Eisenberg said Millennials will keep the housing issue front and center as the generation is approaching its peak. He urged credit unions to “chase them.”

The Federal Reserve

Eisenberg said the most negative impacts of monetary policy will not come until September.

“The Fed knows nothing. (Chairman Jay) Powell isn’t stupid, he’s smart, he just doesn’t know the freaking future. He’s gaslighting. The Fed shouldn’t give us dot plots, because they don’t know anything.  The Fed is going to keep rates up for a while. Why? Because Powell has been burned. He said in 2021 that inflation is ‘transitory.”

While core inflation is coming down, it hasn’t come down much and it seems to be “sticky,” according to Eisenberg. But he also noted the Fed has a long memory and Powell doesn’t want to be the fourth Fed chairman to create an “inflationary apocalypse.”

The Forecast

How long will a recession last?

“I don’t think it will last that long,” said Eisenberg. “Nothing terrible has happened. Commercial real estate could metastasize, but I don’t think it will. Historically, we have had short recessions, but when Fed has acted prematurely in past to lower rates, it has induced a recession.

“We will have a recession in the next six to nine months.”

The Takeaways

According to Eisenberg, the key takeaways he wanted his audience to have included:

• 2023 will weaken during the second half of the year
• The Fed will raise rates once more
• Job growth will slow
• Inflation is clearly declining
• Watch inflation and unemployment