Will Start to See Recession by Summer: Hyman

[00:00:00] Speaker 1: Time now for our Wall Street Week daily segment. The host of Wall Street Week David Weston joining us as he does every day at this time. And David you sit down with a lot of interesting folks but you actually had a chance to sit down with really one of the legends in economics and really independent research out on Wall Street at Hyman a little bit earlier. [00:00:14] Speaker 2: Yeah and you said it Romain and we had those strong numbers out on Friday and yet they're still projecting a recession. So we sat down with Ed Hyman. He is the vice chair of Evercore and the chair and founder of Evercore ISI. And we asked him why he still thought we're going to have a recession at least by Q3 despite those numbers. [00:00:30] Speaker 3: So this is the toughest time I've had. I've never forecast a recession this far in advance so this could be the end of my career. But early on I became a follower of Milton Friedman and the money supply and the money supply is now contracting and it's associated with the banking crisis. Bank deposits come down and then somewhere along the line I picked up the yield curve and as you know it's it's significantly inverted. And then just as a follower of the policy you have QT as the third item. There's no history on that really discussing it or analyzing it. But then I've also found that if we're tightening and other central banks aren't tightening it's not so bad. But if we're tightening and other central banks are tightening it makes our tightening much more aggressive on the economy. So obviously you have all those at work and they take about a year and a half to impact. If you can believe this John Maynard Keynes wrote a paper in 1923 saying it took 16 months. So the economy right now is very strong. It's amazing. But I'm patient. And I think that by the summer we'll start to see a recession unfold. [00:02:00] Speaker 2: So is the Fed caught in between because the Fed is looking at a lot of the numbers you're looking at for sure. And they're seeing some slowing in some places. At the same time you look at those jobs numbers. So by the way look at the wage numbers that were up five tenths of a percent I believe in the last round. [00:02:17] Speaker 3: Does the Fed have to keep those rates high. I don't think so. So you know I'm pretty senior. I've been through a lot of these things. And the lags are real. I mentioned the 06 07. And it feels to me that the Fed gets a number and they say well we have to adjust for that number. And I'm saying no no it takes a year and a half to see or a year to see what you've done. But the least convincing part of my forecast is what you put your finger on. The wage number was up half a percent which annualizes to six. And year on year is about four and a half. And if productivity was say two or one you're not you know you're still not getting very close to the Fed's target. So that that part has been the most troubling. The lack of evidence that wages are slowing. They're slowing a little bit but it's been pretty grudging. [00:03:19] Speaker 2: At the same time the Fed has obviously raised rates a lot and fairly fast a lot of people think. And the nominal rate that they have the federal funds rate as you pointed research is not really the effective rate given the fact we have quantitative tightening at the same time. [00:03:33] Speaker 3: So the the Federal Reserve in San Francisco has this measure you're referring to and it puts the fund the funds rate at about six and a half. Wages as I mentioned the average hourly earnings were about four and a half. So by the standard measure five and a quarter for funds rate or adjusted for QT it's more than that. So I feel pretty good about our forecast until I walk over here to see you. And the street traffic is like it's crazy out there. Restaurants are busy. And so it's right now the economy is pretty strong. But I think it's slowly slowing and we'll keep slowing. And as I mentioned the you know when it's impacting when you get a financial crisis. [00:04:24] Speaker 2: So we also have the Fed tightening into not necessarily crisis in banks but certainly a lot of uncertainty about the banks. We've had the regional bank problems since March. What is that doing for the Fed. Is that helping the economy slow down at all. Are we seeing any evidence of that. [00:04:40] Speaker 3: No. I mean we've definitely seen the banks in trouble and you've seen a huge decline in deposits. They're down about five percent which hasn't happened since the 1930s. But credit growth is still strong. And on the Friday's numbers they were up about nine percent year on year on the CNI loans. And and then they have the monthly numbers on consumer borrowing. And they're up like I don't know 12 or 15. It's right. So I'm forecasting the economy to slow down. Now you do get into a funny situation when it starts to weaken as you start to get people borrowing for a problem. You know they're running out of money and so they are running tight and so they tend to borrow money. So credit expansion tends to be a lagging indicator. [00:05:42] Speaker 2: So you are forecasting a recession even if you're a little nervous about the forecast but you're forecasting a recession. So let's assume you're right that we go into negative numbers in Q3 Q4. How long does it last. [00:05:54] Speaker 3: I'd say at least through the first or second quarter of next year. So there are these are the possibilities. No recession. The soft landing hard landing or severe recession. Of I don't see a severe recession. That would be something like eighty nine or two thousand eight two thousand nine. But there aren't the excesses for that. But I'm in the hard landing camp five percent. But I'm always thinking you know what what am I missing here. And it's possible maybe none of those are right. Maybe we just have an extended period of time of very slow growth. Maybe for several years. We don't get a recession. We don't get a hard landing but it's a you know extended period of very slow growth. That's not my best guess. But always thinking about alternatives.