DI economist Steve Slifer offers financial forecast; recession appears ‘inevitable’

“We need to do better.” 

 

That was the resounding theme behind this year’s Economic Outlook Conference, hosted by Steve Slifer, owner and chief economist at NumberNomics, at the Daniel Island Club on Dec. 6. Most Americans have felt the impact of rising inflation over the last 12 months, as prices for groceries, homes and other commodities and services have risen to new heights. 

 

“I think the fiscal and monetary policy that we’ve got in this country has gone seriously off track,” Slifer told the sold-out crowd at his popular annual event. 

 

The chief U.S. economist for Lehman Brothers in New York City from 1980 until his retirement in 2003, Slifer focused primarily on answering some of the more pressing questions on the minds of his audience members: How quickly is the economy growing? How high will inflation go? Will there be a recession? 

 

BY THE NUMBERS

 

Current numbers, according to Slifer, paint a less than rosy picture. The GDP (Gross Domestic Product) fell 31.2% in the second quarter, about $2.2 trillion below its potential growth path. Mortgage rates have climbed from 3% to 6.5%, leading to a significant drop in home sales. The U.S. has added some $7.4 trillion to its outstanding debt over the last three years, a “monster jump” that Slifer mainly attributes to excess stimulus spending. Between March 2020 and March 2022, he said, the government issued a total of $9.5 trillion in stimulus payments to Americans. 

 

“The last couple of years treasury debt has just exploded,” Slifer said. 

 

Slifer, who spent a decade as a senior economist at the Board of Governors of the Federal Reserve in Washington, D.C., puts the blame squarely on the government’s shoulders.

 

“It wasn’t consumers or business people that did any of this,” Slifer said. “This was on the government… I think they felt some responsibility to make people whole.”

 

THE INFLATION CONUNDRUM

 

According to Slifer, the Fed thought rising inflation was just temporary, the result of supply disruptions during the COVID-19 pandemic and other factors.

 

“They stuck to that theme for a year and a half,” he added. “They didn’t give up until December of last year, and then they finally (acknowledged) ‘this inflation is just not as temporary as we thought. We’ve got a problem’… The Fed in my view was about 18 months too late.”

 

Slifer described the consequences as a real “mess,” citing “out of control” inflation (the rate is currently 7.8%), soaring interest rates, and excess government spending. The financial markets have also felt the impacts, he said. 

 

“The stock market – it reached a high in January of 2022, and then just took a dive… And at one point was down 23%. It’s come back up a little bit, but the stock market has gotten whacked pretty good… the bond market has done the same thing.”

 

Although the economy has rebounded somewhat recently (GDP growth was up 2.9% in the third quarter), consumer sentiment remains on the decline, Slifer noted.

 

“We’re 70% of the (GDP) pie,” Slifer said. “Sentiment has dropped like a rock.”

 

But surprisingly, consumers are still spending, a trend Slifer attributes to the low unemployment rates. Anyone who wants a job in this market, can get one, he said.

 

“I think if you don’t worry about not having an income stream in the months ahead, you’re spending just keeps going,” added Slifer, pointing to the current unemployment rate of 3.7% (4% is full employment).

 

LOOKING AHEAD

 

When discussing the housing industry, Slifer noted that home sales have dropped sharply, to 4.4 million units in September, while prices have risen dramatically. But he expects to see mortgage rates eventually cap at about 7% or 7.5%, sales to start ticking up and prices to come down.

 

“Home prices have really started to drop off a bit,” Slifer said. “And probably they’re going to keep going in that direction for a while…and housing affordability will begin to pick up as we get through the early part of next year.”

 

Also on the horizon for 2023 – a moderate but positive GDP growth of 1%, noted Slifer. But despite small glimmers of hope in the economy, the real funds rate and the shape of the yield curve are signaling a mild recession could be on the way, Slifer added.  

 

“Both of my warning signs are telling me that something is going to happen by the middle of next year,” Slifer continued. “So for that reason I am looking for a recession in the first half of 2024, followed by a bit of a recovery as we go into the second half of that year… So no recession for now, but I think it’s inevitable.”

 

Another looming problem – the predicted insolvency in the near future of both Social Security and Medicare, which Slifer expects to happen in 2028 and 2034 respectively. And with today’s divided political climate, he doesn’t see any meaningful solutions coming any time soon. 

 

“It bothers me that nobody is talking about this,” Slifer added. “As an economist, we can always have a discussion about how to fix this… The point is, economists know what to do, but getting the will to do it is something that is seriously lacking.”

 

“The bottom line is we need to do better with our policy,” Slifer continued. “… The outlook for the next two years is okay. I wish the recession would be sooner rather than later, so we can get this behind us.”