Walker Webcast: Mark Zandi on Why a Recession is Unlikely

Article originally posted on HERE on August 3, 2023

Marc Zandi, chief economist with Moody’s Analytics, was early in predicting that the U.S. wouldn’t enter the recession that most were forecasting up until recently. It’s a point he continued to emphasize on his appearance in the latest Walker Webcast.

“Recession is at core a loss of faith,” Zandi told Walker & Dunlop CEO Willy Walker. “Consumers lose faith that they’re going to hold on to their job and they start pulling back on their spending. They run for the bunker.”

This is followed, he continued, by “a loss of faith by businesspeople that they’re going to be able to sell whatever it is that they produce and they start laying off workers. And you get into this kind of self-reinforcing negative cycle. No evidence of that at this point.”

Talk of a recession these days tends to dovetail with talk of the Federal Reserve’s monetary policy, which over the past year has been geared toward slowing inflation by raising the federal funds rate, a strategy that seems destined to lead to a recession. It’s also a strategy that Zandi has advocated halting for some time.

“In my view, the inflation that we’re suffering from is largely due to the supply shocks created by the pandemic and the Russian war and the conflation of those two things in inflation expectations,” said Zandi.

As the effects of the pandemic and the Russia-Ukraine war recede in the rearview mirror, “inflation will moderate and we don’t need high, much higher, interest rates,” he said. “We don’t need to push the economy into recession to get that inflation [down].

“That feels like that’s what’s happening now: inflation has come in quite dramatically,” he continued. “All the trend lines look very good.” He noted that the employment rate hasn’t moved appreciably from 3.5% in the past 12 to 18 months.

This doesn’t mean that Zandi’s current recession outlook is rosy across the board. He pointed to the aggressive actions the Fed and other federal regulators had to take in March amid the regional banking crisis. “The reasons for why the banking system got into trouble haven’t gone away,” he said.

Zandi cited the yield curve inversion and the impact that’s had on banks’ operating environment. “I view that as a significant risk or threat to my optimism about the economy,” he said. “If they keep putting pressure on the system and they continue to raise rates and cause the curve to go even more inverted, at some point, they’re going to break something that they’re not going to be able to fix quickly. And we will go into recession.”

On a more positive note, Zandi looked to U.S. household debt, which he said was “very well insulated from this run-up in interest rates. Their so-called debt service burden, the proportion of their after-tax income that they must pay to remain current on that debt, is about at a 50-year low. And it’s not rising again because people have locked in those low rates,” largely in a refinancing wave that occurred before the Fed began raising rates.

“So that’s really been very helpful,” he said. “It’s also one of the biggest distinctions between our economy and everywhere else in the world.”

Zandi and Walker also discussed the labor market, the federal deficit and the implications of Fitch Ratings’ downgrade of U.S. debt, among other topics in an hour-long conversation. On-demand replays of the August 2 Walker Webcast are available on the series’ YouTube channel.