US Could Be Headed for Mild but Short Recession, Households and Housing Hurting the Most: Expert

With both presidential campaigns highlighting their economic plans, some analysts are saying a recession could be on the horizon. Joining me now to assess the current economic conditions and some of the data is economist Douglas Holtz-Akin. He's the president of the American Action Forum. Douglas Holtz-Akin, thank you so much for joining. My pleasure, thank you. It's great to have you on. So Douglas, today President Biden and Vice President Harris giving remarks on the progress that they're making to lower costs for the American people. But even as inflation is slowing, analysts are saying a slowing labor market, rising unemployment are precursors to a recession. How do you assess the economy and where we're at right now? Well, the economy is actually hanging in there quite remarkably well. I had deep concerns late last year that the U.S. might enter a recession. Business fixed investment was very weak and the household was carrying the entire burden of spending. Earlier this year, roles reversed and it looked like households were getting tapped out, but both have recovered somewhat. And at this juncture, we've got pretty solid growth in the economy. We look at the most recent data, unemployment insurance claims, for example, went down, not up. And retail sales for the most recent month are up 1%, which is much stronger than people expected. So the numbers are hanging in there. Now, here's the concern. Last year, real disposable income, the sort of power for consumer spending, grew an average annual rate of 4%. This year, it's been 1%. So how much longer can households continue this pace of spending without getting a little better income growth? I think that's the main concern. There's obviously a lot of data points. We just said the PPI, the CPI, excuse me, all different data points. Americans increasingly are delinquent on their credit cards. If you look at this type of data, will this affect the overall economy? Well, I think this reflects my concern. We've got consumer spending grinding along at 2%, 2.5%, pretty solid. We've got income growth down at 1%. That can't last forever. You fill that gap by credit cards and other borrowing. And I think we're going to start to see some real stresses on households if that continues. And how could a potential recession impact different sectors of the economy? And how do you think businesses and workers can best prepare to mitigate those effects? Well, I think this would look like a traditional 20th century recession, not a financial crisis cataclysm, not a dot-com bubble, just high interest rates taking their toll on people, can't make ends meet. That means the Fed can turn around and cut rates. And across the board, you'll see some places where real weakness has shown up, household spending, the housing sector just really in disarray at the moment, get some relief and turn around. So if we go into a recession, I expect the main components to be households and housing and a relatively quick reversal, mild recession, couple of quarters at worst. So in your view, what would you say are some of the most effective strategies for policymakers to balance economic growth with financial stability? I think for policymakers, they need to first deliver financial stability of their own. The federal budget is badly out of alignment, $2 trillion deficit as far as I can see, debt rising as far as I can see. Let's take any notion that the United States can't manage its finances off the table by being serious about the outlook for the federal budget. That'd be step number one. Step number two, deliver continuous, rapid trend economic growth that people can rely on. So that means coming into a debt ceiling fight, let's not have a meltdown over that, coming into a debate over the Tax Cuts and Jobs Act sunset at the end of next year, get that done, get that out of the way, deliver a clear path for the private sector to operate in. And then things happen, there's good news, bad news, and the Fed can offset, but they have to set the basic roadway and clear some of these obstacles. Traditionally, you mentioned the debt ceiling that's looming in September. Republicans could with the House Freedom Caucus. Traditionally, in an election year, how do we typically see such issues being resolved? And what do you anticipate? I anticipate two separate issues resolved a little bit differently. We have to fund the government. That's going to hit first, September 30th, as you said. And I don't see a big problem there. Both parties are going to agree they want to get past the election. They'll fund the government on a short-term basis to pass the election, at which point they'll judge the lay of the land. And if one party has a majority, both the House and the Senate, they'll kick it to next year and get what they want. Or if there's no clear resolution to that, they'll just wrap things up in December and we'll be done. The debt ceiling comes back in full force January 1st, 2025. I think that's a little bit more problematic. We'll have a new Congress not yet seated. We'll have a new president, an administration not yet staffed. What will that look like? I think that's the first one I'd worry about seriously. And lastly, if you could, the Federal Reserve anticipated to cut rates in September. What are the implications for this and how do you think this will ultimately play out? I think the best we know at the moment is what the Fed will do in September is ratify the obvious and the existing. The economy is coming closer into balance. It's not highly inflationary with no risk of recession. The risks are more balanced now. Monetary policy should be more balanced. It shouldn't just be leaning against inflation. It should be less restrictive. And so they'll cut, not dramatically, 25 basis points, laying the predicate for further such easing down the road. That's taking care of business because conditions allow. They don't have to do anything preemptive or extraordinary at this juncture. And that's a good thing. Douglas Holtaken, really appreciate your perspective. Thank you. Thank you.