ITR Economics predicts a turbulent two years for American industry. An economic downturn in 2021 will result in a recession the following year, foreshadowing challenges for many firms and sectors throughout the nation.
“We’re still calling for more of a slowing growth cycle in 2023, but the original soft landing that we were calling around the end of 2023 now looks like it’s turning into a hard landing in 2024,” ITR economist Patrick Luce told The Epoch Times.
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When treasury rates abruptly changed, ITR’s projection was revised, illustrating the value of crucial indicators for well-informed decision-making.
Since the 10-year treasury yield fell below the 2-year yield and triggered an inversion, investors have been acting dramatically. This is a serious indicator of impending economic turmoil since it has previously occurred 12 to 18 months before recessions began.
Luce ascribed the gloomy forecast to this year’s sharp rise in interest rates by the Federal Reserve, whose March rate reached a record high of 4%.
He said.“We see this year that the Fed pushes too hard too fast,”
In order to prevent inflation, Jerome Powell, the chairman of the Federal Reserve, has argued for maintaining a cautious stance when it comes to changing interest rates.
Despite a promising beginning to 2021, with inflation securely around 2%, things quickly started to reverse. Prices had risen sharply by June of that year, when they were at an all-time high of 9%. Thankfully, this increase has now gradually abated, with statistics for November coming in at 7.1%, considerably closer to predictions.
Unprecedented government expenditure during COVID-19 and worldwide lockdowns have been followed by a sharp rise in inflation. Market volatility and price increases brought on by supply chain interruptions have been crucial factors.
The interaction of the two elements “bottlenecked the system,” said Luce.
Some observers attribute the rise in inflationary pressures to the Biden administration’s strict energy policies as well as the continuing crisis in Ukraine.
Jerome Powell, the chairman of the Federal Reserve, is highlighting the need of regulated demand in his attempts to close the gap between output and consumption. He thinks that by doing this, the economy will regain its equilibrium without having to depend on its conventional supply-side levers.
The Federal Reserve must balance its monetary policy to keep inflation in check while ensuring that the overall economic environment is not too constrictive. They must achieve this delicate balance if they are to properly govern the economy of the country.
“These impacts, they don’t happen overnight,” Luce said. “They take time to manifest themselves in the broader, macroeconomic sense.”
When compared to a train, the economy may be thought of as the cars farther down the track experiencing economic patterns firsthand. The individuals farther back in the group are just now starting to catch up with what has already started to happen at locations further down the road.
“The financial sector leads the economy. Housing market, specifically single-unit housing, leads the economy,” Luce said.
The indicators create a fictitious train that is going down an economic track, from new orders to consumer pricing. Consumer price changes, which the Fed is trying to affect, are what determines the movement’s pace and direction.
It is encouraged to take preventative steps for a secure financial future since the housing industry is displaying indicators of an imminent recession.
One of the first areas to experience trouble when interest rates increase is the housing market; loan activity plummets and mortgage payments skyrocket.
As a result of a sharp decline in the number of housing permits issued in October, ITR came to the conclusion that the industry was already experiencing recessionary circumstances.
“That contraction is already underway,” Luce said.
“It is our expectation for that to continue throughout next year and even into the first quarter of 2024.”
Despite the present crisis, he is cautiously hopeful that it won’t have the same devastating effects on his industry as the Great Recession of 2008.
“Inventories are much lower today then they were back in 2005–2006 as they were leading up into the Great Recession,” he said.
Due to people’s continuous capacity to pay their mortgages, homeownership rates remain stable despite the present economic climate, with low vacancy rates and high occupancy.
“The consumer’s ability to service debt right now and household ability to service debt right now is very strong,” Luce said.
Exorbitant prices put pressure on the housing market and act as a barrier to entrance.
By late spring of 2020, the Federal Reserve is projected to increase interest rates up to 5%, signaling a change from the present low-rate environment.
“As that federal funds rate peaks and if they start to bring it back down, that will also give easing to that affordability situation within the housing market,” Luce said.
The housing market will be impacted differently depending on the location; there is no one-size-fits-all solution. While some areas can see huge price drops, others might only see small drops or perhaps see no change at all.
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The sector was “stimulated over trend” because it occurred during the epidemic. “more susceptible to the pullback in kind of that post-COVID era,” Luce said.
The economy is projected to face a brief recession early in 2024, as forecasted by ITR. Uncertainty surrounds how this downturn will effect many business and industrial sectors, but one thing is certain: success in the next turbulent economic times will depend on cautious preparation and prudent money management.
The recession may mirror the Great Depression in terms of GDP. “flat and bouncy” one of 2000–2001, according to Luce.
The forecast for industrial output is bleak and may be similar to previous economic downturns.
“Definitely more mild than what we saw during the Great Recession,” he said.
He clarified that the recession will not result in deflation but rather “a temporary reprieve” in inflation.
Over the next ten years, inflationary pressures are anticipated to continue strong due to the aging of the US population and the emigration of employees who are retiring. This tendency has been made worse by the epidemic, which has accelerated many people’s retirements when they may not have otherwise.
“When I look at the labor force participation rate, the majority of demographics are back on trend, but folks over the age of 65 especially haven’t gotten back to that participation rate from the COVID era,” Luce said.
Additionally, the lockdown issues and pandemic have sparked an “onshoring trend” of businesses moving manufacturing to the United States and decreasing their reliance on imports. This increases the need for domestic labor.
As a consequence of supply chain interruptions, businesses are expanding their inventory levels, which lowers capital efficiency and raises inflationary pressures.
“Those trends are real and we’re feeling them,” Luce said.
The Fed may encounter problems if it sticks to its objective to manage inflation at or below 2 percent. “structural” factors “providing more inflationary pressures above that 2 percent level,” he said.
The ITR projection anticipates a stable employment market. “strong enough to support ongoing real income growth” and that food prices will “moderate or come down,” Luce said.
ITR does not seek to foresee government actions in ambiguous times; instead, its forecasting methodology mimics the characteristics of a free market.
