The optimistic economists

Nov 23, 2022

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When the narrative has moved so clearly in one direction, we think it's helpful to check in from time to time with the outliers.

Yes, there are still some people — and not just Fed Chair Jay Powell! — who think the U.S. economy can avoid a recession next year, despite a growing consensus among economists and investors that a downturn is inevitable.

So what's the case?

Moody's Analytics Chief Economist Mark Zandi, whose outlook has been called overly rosy by some, laid out several reasons for optimism in a note this week:

— The difference between 10-year and 2-year Treasury yields has been deeply inverted — a strong signal that a recession is coming — but other parts of the Treasury bond yield curve have only been flirting with inversion, or inverted only modestly. And the curve may be sending a misleading recession signal given how bloated the Fed's balance sheet remains, Zandi added.

— With the U.S. banking system so highly capitalized — thanks, Dodd-Frank! — it's much less likely financial institutions will pull back on providing credit that the economy needs to avoid a recession, Zandi said.

— Inflation is moderating. Consumer price inflation peaked at 9 percent from a year earlier in June, slowed to 7.7 percent in October and should be down to 4 percent by June 2023, he said. And a recent stall in increases for new housing leases will help slow growth in housing costs, cooling inflation further next year. (This forecast assumes oil prices remain stable, supply chain pressures ease and the labor market loosens up.)

— Consumers and businesses are resilient. Households in the bottom one-third of the income distribution may be tapped out, "but, those in the middle and top thirds of the distribution, where the bulk of consumer spending occurs, do have savings to spare," Zandi said, pegging the excess savings at $1.7 trillion. Recession is unlikely unless consumers pull back, and it's hard to see why they would, he added.

Goldman Sachs economists also aren't convinced a recession is bound to happen.

Like Zandi, and indeed like some Fed officials, they think core inflation can fall meaningfully without taking the labor market down with it — a key ingredient in any recession.

In a note last week, they saw the personal consumption expenditures index slowing from 5 percent now to 3 percent by the end of 2023, with just a half a percentage point increase in the jobless rate.

Why? From Goldman's Jan Hatzius & Co.: "The reason, we think, is that this cycle is different from prior high-inflation periods. First, post-pandemic labor market overheating showed up not in excessive employment but in unprecedented job openings, which are much less painful to unwind. Second, the disinflationary impact of the recent normalization in supply chains and rental housing markets still has a long way to go. And third, long-term inflation expectations remain well-anchored."

What to watch: We'll be eager to learn how Fed staffers are assessing the outlook when the central bank releases the minutes from its Nov. 1-2 meeting at 2 p.m.

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Driving the Day

Durable goods orders data released at 8:30 a.m. … University of Michigan consumer sentiment survey and new home sales data released at 10 a.m. … Fed minutes released at 2 p.m.

WARREN GOES HARD ON CRYPTO, REGULATORS POST-FTX — Sen. Elizabeth Warren (D-Mass.) in an op-ed for WSJ: "The SEC has brought some enforcement actions related to fraudulent and unregistered crypto offerings over the past few years, but it has fallen far behind as the crypto industry has drawn in millions of new investors … Justice, SEC and Treasury are the frontline enforcers, and they need to act like it every single day . Federal agencies should use their expansive authority to crack down hard on crypto fraud. Congress should back up these law-enforcement agencies and financial regulators with more funding."

—Aaron Klein, senior fellow at the Brookings Institution's Center on Regulation and Markets, also writes in TIME: "Congress should not rush to regulate crypto , nor treat the industry with a broad brush assuming all crypto is as corrupt as FTX appears to have been."

TRUTH SOCIAL — Our Declan Harty: "Investors on Tuesday agreed to give former President Donald Trump's social media startup more time to close a deal with a partner company that would land the new venture on a Wall Street stock exchange and raise hundreds of millions of dollars. There's one problem: Federal regulators at the Securities and Exchange Commission may still have reason to block the deal ."

A 500-THREAD COUNT SAFETY NET — POLITICO's Brian Faler: "Some of the nation's wealthiest people … received unemployment checks in the wake of the coronavirus outbreak. More than 19,000 people who made at least $1 million in 2020 also collected jobless assistance that year, new IRS data show . That included 4,500 people who earned between $5 million and $10 million and 229 people with eight-figure incomes or more."

OIL PRICE CAP — WSJ's Laurence Norman and Andrew Duehren: "The U.S. and its allies are seeking to agree on a level for a price cap on Russian oil as soon as Wednesday , with officials discussing setting it at around $60 a barrel as the group rushes to put the plan into place before Dec. 5, according to people familiar with the talks."

The Treasury Department released guidance on how companies can comply with a cap and said an announcement on where the price will be set could be made in the coming days, your MM host reported.

Regulatory Corner

WHIPSAW — Our Nick Niedzwiadek: "The Biden administration on Tuesday announced a final rule enhancing the ability of fiduciaries to take account of climate change and other factors as part of their investment decisions , planting a flag in a political debate that has intensified in recent years."

WATCHDOGS — WSJ's Brody Mullins and Rebecca Ballhaus: "A nonpartisan group that monitors government ethics filed a series of legal complaints alleging the federal government is failing to adequately enforce conflict-of-interest rules . The Campaign Legal Center called on the executive-branch agency that oversees ethics rules to investigate what it called deficiencies in enforcement at several agencies."

Economy

FIRST IN MM: FISCAL CONFIDENCE — Americans' confidence in the U.S. fiscal outlook improved slightly following the midterm elections earlier this month, according to the Peter G. Peterson Foundation's November Fiscal Confidence Index . More voters said they expect the U.S. debt situation to improve (30 percent v. just 23 percent last month) and more said they were optimistic about progress on reducing the debt (42 percent v. 38 percent) — pushing the "expectations" component of the index up 9 points, to 68 out of 100. More than three in four voters said the national debt should be a top-three priority for Congress and the president, according to the survey conducted between Nov. 14-16.

Markets

THE HOUSING COOLDOWN HITS PRIVATE EQUITY — WSJ's Will Parker: "Investor buying of homes tumbled 30% in the third quarter , a sign that the rise in borrowing rates and high home prices that pushed traditional buyers to the sidelines are causing these firms to pull back, too."

MAJOR BUYOUT INCOMING — WSJ's Peter Grant: "Fortress Investment Group has agreed to help finance Kushner Cos.' unsolicited $4.3 billion bid to buy rival apartment building owner Veris Residential Inc. , according to a letter from Fortress to Veris's board."

Crypto

IT'S GONE — NYT's David Yaffe-Bellany: "Lawyers for the collapsed cryptocurrency exchange FTX on Tuesday painted a grim picture of the firm's finances and the fate of the billions of dollars in assets that customers lost . 'A substantial amount of assets have either been stolen or are missing,' said James Bromley, a partner at the law firm Sullivan & Cromwell who is representing FTX, at a bankruptcy hearing in federal court in Delaware."

CONTAGION RISK — Bloomberg's Sonali Basak, Erin Hudson, Vildana Hajric, and Muyao Shen: "The troubled brokerage Genesis Global has $2.8 billion in outstanding loans on its balance sheet, with about 30% of its lending made to related parties including its parent company , Barry Silbert's Digital Currency Group … Silbert's Digital Currency Group is the parent company of Genesis and has an interest in more than 200 other firms."

— NYT's Lauren Hirsch and Stephen Gandel: "Genesis Global Capital, the troubled crypto lender, has hired the investment bank Moelis & Company to explore options including a potential bankruptcy ."

In a statement to MM late Tuesday afternoon, Genesis said: "Our goal is to resolve the current situation in the lending business without the need for any bankruptcy filing."

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Fly Around

Less than a month after softening pandemic restrictions, China has reinstated some "zero-Covid" policies in an effort to control a new wave of infections surging across the country. — NYT

Gazprom PJSC threatened to cut its gas flows sent via Ukraine next week , just as cold winter temperatures prompt Europeans to start tapping their stores. — Bloomberg

Germany and France pushed Tuesday for tougher industrial policies such as more state subsidies for European businesses to counter the threat from U.S. reforms that risk triggering a transatlantic trade war. — Our Hans von der Burchard and Giorgio Leali

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