David Rosenberg, the top-ranked strategist and economist at Gluskin Sheff & Associates Inc., said a recession is more likely next year as the Federal Reserve raises interest rates and chokes a debt-burdened economy.
“The volume of refinancing in the business sector that will take place at higher rates in the next several years is without precedent,” he said in an April 4 report to clients. “And at a time when the investment-grade corporate bond universe is the junkiest it has ever been…this will be epic.”
The Fed has cautiously raised interest rates since December 2015 after keeping them at record lows for seven years as the U.S. economy recovered from the worst decline since the Great Depression. The idea was to encourage debt-financed spending that would lift the economy out of the doldrums.
Borrowers of every kind – governments, businesses and consumers – piled on record levels of debt during that period. Current and past Fed officials such as Alan Greenspan and Janet Yellen warned about the negative effects of escalating government debt, particularly in the context of tax cuts approved by President Donald Trump.
Rosenberg, who forecast that an economic slowdown will be a key theme after this year's mid-term elections on Nov. 6, said investors shouldn’t expect most economists on Wall Street or at the Fed to ever predict recession. Look no further than 2007, when the outlook was still sunny despite a collapsing real estate bubble.
“All the economists and market players who missed it in 2007 are still employed today,” Rosenberg said. “The Fed is no different even though it has the most sophisticated macroeconomic models on the planet. Even so, it has missed every recession in the last four decades.”
The GDPNow model created by economists at the Federal Reserve Bank of Atlanta estimates real GDP growth in the first quarter was 2.8 percent, up from 2.4 percent on March 29. But the model also has a history of downward revisions — two months ago, it predicted growth of more than 5 percent for the first three months of the year.
Rosenberg said that any notion that the U.S. economy is doing well is misplaced, especially considering data that show consumers are strapped in spite of tax cuts.
“Real retail sales have declined at a 4.4 percent annual rate from November to February,” Rosenberg said. “Housing starts over the past three months have collapsed at an 18 percent annualized pace.”
Other survey data that measure manufacturing and homebuilding activity also have softened. The Architectural Billings Index, a key forward-looking measure for the construction industry, fell to a four-month low of 52 in February from 54.7 a month earlier. A reading above 50 still indicates growth, but the rate of expansion slowed.
“I, for one, am not impressed,” Rosenberg said, “and fail to see the escape velocity that the bulls do at the current time.”
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