Bad Data and Bad Policy Will Force FED To Scramble To Cut Rates 

In an insightful interview with Adam Taggart of Thoughtful Money and David Rosenberg, former Chief Economist at Merrill Lynch, they shared a deep analysis of post-Covid economic trends. Rosenberg expressed that despite avoiding a recession last year—contrary to the predictions of many economists—the US is not likely to stave off economic downturn much longer, challenging the widespread anticipation of a “soft landing.” During the conversation, he emphasized the abnormal surge in consumer spending triggered by substantial government stimulus following Covid, which marked a departure from the usual consumer behavior of equally dividing spending and saving. In the years 2021 and 2022, as the government continued to provide financial support, consumer spending, which accounts for approximately 70% of the US economic growth, escalated remarkably. By 2023, even as savings began to diminish, consumers did not reduce spending; instead, they increasingly leaned on credit cards and buy-now-pay-later schemes, leading to a surge in credit card debt and default rates to levels not seen since the 2009 financial crisis. The Federal Reserve, mandated to promote maximum employment and stable prices, initially misjudged the inflationary pressures as “transitory” issues tied to supply chain disruptions. However, they later recognized the severity of the situation and raised short-term lending rates from near zero post-Covid to 5.5% by July 2023. These rate hikes, affecting loans across various sectors, typically take 12-18 months to influence the broader economy, with the Fed aiming to reduce inflation back to around 2%. Currently, inflation is in the mid-3% range, but Rosenberg anticipates it will continue to decline over the next year. He is skeptical of the seemingly robust employment data, critiquing the Bureau of Labor Statistics for possibly overstating job growth by as much as 1 million due to a low participation rate in surveys and reliance on a modeling approach—the birth/death ratio—that may inaccurately boost reported job numbers. Rosenberg prefers the more precise but less frequent Quarterly Census of Employment and Wages, which samples 12 million businesses and aligns more closely with real market conditions, despite its reporting lag. A looming crisis in the commercial loan market further complicates the economic landscape, with about $7 trillion in loans due for refinancing soon. These loans, originating in a period of low interest rates pre-Covid, now face a harsh reality. Many office properties have lost tenants and depreciated in value, confronting property owners with higher refinancing rates and significant financial shortfalls because of new lower appraised values. This situation is likely to result in a wave of foreclosures, as temporary financing solutions offered by banks begin to wane under regulatory pressures This applies to all property types even if they have not lost tenants, higher interest rates will put pressure on appraised values across the board. He believes that residential properties, on the other hand, will continue to slowly increase in value because of the continuing supply/demand distortions. Rosenberg concludes that the convergence of declining consumer spending, inaccurate job market readings, and intensifying pressures in the financial sector will inevitably prompt the Federal Reserve to revise its policies and lower interest rates later this year. He projects that by late 2024 or early 2025, the US will likely be in a recession, compelling the Fed to enact substantial rate cuts to mitigate the economic downturn.