According to a prominent economist, the US economy may be heading towards a hard-landing recession, despite hopes for a softer landing.
Stephanie Pomboy, who spent a decade at ISI before founding the research firm MacroMavens, is known for her early warnings about structural issues in the housing and credit markets prior to the 2008 crisis. In a recent interview, she cautioned about a potential “double-dip” profit recession looming for US companies, which could lead to a significant downturn in earnings and pose substantial challenges for the overall economy.
Pomboy’s concern stems from the Federal Reserve’s aggressive series of interest-rate hikes, during which central bankers raised rates by 525 basis points over a span of 17 months in an effort to combat inflation. Despite market expectations of significant rate cuts later this year, Pomboy believes that higher rates are likely to persist for the foreseeable future.
In her interview with Rosenberg Research, Pomboy stated, “We are not going to avert a hard landing.” She dismissed the notion that the Fed could implement such rapid and substantial rate hikes on an economy burdened by record levels of leverage without experiencing economic or financial repercussions.
While some observers have scaled back their recession forecasts, Pomboy highlighted signs of consumer distress. She pointed out that retail sales have stagnated for the past two years and, when adjusted for inflation, are already indicative of a recessionary environment.
Pomboy warned that the consumer recession could soon be followed by a decline in corporate earnings, as the full impact of the Fed’s rate hikes has yet to materialize in the economy. This would further strain companies already facing weakening profits and higher borrowing costs.
Despite a nearly 30% surge in stock prices over the past year, corporate earnings have only increased by 4%, Pomboy observed. She anticipates a scenario of a “double-dip” profits recession, which could significantly weaken companies’ ability to service their higher-cost debt, leading to broader economic challenges.
Pomboy’s perspective aligns with that of other market commentators who have cautioned against unsustainable levels of stock prices. Notably, top economist David Rosenberg has likened the current market conditions to those preceding the dot-com bubble and the 2008 market crashes, suggesting that the market may be in a bubble that is primed to burst.
