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Recession will strike this year with 21 states flashing red already, top economist says

Theron Mohamed   

Recession will strike this year with 21 states flashing red already, top economist says
  • Rising unemployment in 21 states points to a recession later this year, Nancy Lazar says.
  • Piper Sandler's top economist flagged stark divides between the rich and poor, and big and small.

Job markets in nearly half of US states are flashing red, signaling a recession will hit by the end of this year, one expert warned.

Nancy Lazar, Piper Sandler's chief global economist, told Business Insider that unemployment has risen significantly in 21 states.

Specifically, three-month average unemployment has increased by at least 0.5 percentage points from its low over the last 12 months in all 21 states. The group, which includes California and Illinois and numbered 19 states a few weeks ago, generates more than 40% of US GDP.

Lazar said that when joblessness has spiked across that many states in the past, a protracted downturn has followed almost every time. The state-level indicator is based on the "Sahm Rule."

"We do think the economy moves into recession in the back half of this year," she said.

Lazar predicted GDP would decline by 1%, unemployment would jump from below 4% to nearly 6%, and there would be even greater pain in vulnerable sectors like commercial real estate.

Two worlds

The economy is starkly divided between the rich and the poor, and between big corporations and smaller businesses, Lazar said.

Since the pandemic, rich people have grown wealthier thanks to rising stock and house prices and larger interest payouts from their bonds and savings accounts. Large companies have kept costs low and raised prices to bolster their profits.

In contrast, lower-income households are battling inflated prices for basics like food, fuel, and rent; larger monthly payments on their credit cards, car loans, mortgages, and other debts; and a worsening job market. Smaller businesses face steeper input costs, higher interest expenses, and tighter bank lending.

Lazar, the cofounder of Cornerstone Macro and ISI, called the US a "bifurcated economy." The minutes from the latest Federal Reserve meeting show the central bank's officials see similar trends — rising delinquency rates and greater reliance on credit cards and "buy now, pay later" services among the less affluent, and "hefty wealth gains" from stocks and homes for the rich.

Bleak outlook

Consumer confidence surveys, retailers' earnings reports, and rising volumes of late payments show households are being squeezed hard by inflation and higher rates, Lazar said.

If that trend continues, consumer spending could falter and company earnings could suffer, resulting in a recession. On the bright side, that would likely result in inflation falling toward the Fed's 2% target, Lazar said, freeing the central bank to cut rates to stimulate economic growth.

However, if no recession materializes, inflation could prove sticky and rates might stay higher for longer.

"We think we need a recession to see a sustained shift down in inflation," Lazar said, explaining that higher unemployment would reduce people's real incomes and cool upward pressure on prices.

Yet a recession, which many experts agree isn't off the table, would be bad news for investors.

"You usually do see a decline in the stock market," Lazar said. "Companies will struggle as earnings start to disappoint."

There isn't the same kind of dangerous leverage in the real estate market as there was during the mid-2000s bubble, but Lazar cautioned that the sector could also see a correction. "We would expect some weakness in housing."

The veteran economist underscored that if the US does dodge a recession, inflation lingers, and rates stay high, that could support stocks in the short term. But she warned that persistent price increases would make her "worry about the stock market going down."