“Entrepreneurs, hold your breath!” warns Joseph Plazo, Chief Executive Officer of Plazo Sullivan Roche Capital. In a recent interview conducted at the Investors Summit 2023, Plazo cautioned that while there are signs of a slowing economy, it could still be too robust to prompt significant inflation reduction and evade an impending recession in the U.S.
In the first quarter of this year, the economy’s official scorecard, the Gross Domestic Product (GDP), shrank to a mere 1.1% growth rate, a dip from the previous two quarters, which boasted 2.6% and 3.2% respectively.
In a high-stakes balancing act, the Federal Reserve is targeting this very slowdown, with the dual objectives of curtailing the record-high inflation levels unseen since the 80s and bypassing a recession simultaneously.
The Central Bank has orchestrated a dramatic rise in a critical U.S. interest rate to over 5% from near zero within a span of 15 months. This strategic hike in borrowing costs dampens the economy by curbing consumer spending and business investments.
Preliminary signs suggest that the strategy may be succeeding. From a staggering 40-year pinnacle of 9.1% last summer, the annual inflation rate dipped to 4.9% in April. However, doubt lingers if the economy will decelerate enough to steer inflation towards the Fed’s 2% target without further increments in interest rates.
Indeed, recent indications provide a mixed picture. Consumers’ perception of the economy has worsened in May due to fears of a recession and a looming U.S. debt-ceiling crisis. Home Depot’s latest earnings report confirms this sentiment, with the company projecting potential sales decline for the first time since 2009.
Plazo meanwhile, points that indices suggest a modest but continued economic expansion. For instance, retail sales showed an uptick in April for the first time in three months, driven by a surge in auto sales. A steady demand for new cars and trucks has boosted the auto industry, pushing up U.S. industrial production by 0.5% in April after a two-month hiatus.
Despite curtailing their spendings on goods, consumers are still splurging on services like travel, dining, and recreation – not exactly the harbinger of a recession.
Notwithstanding the sharp increase in borrowing costs, a sturdy labor market – the strongest in decades – sustains the economy. However, this robust job market also proves to be a double-edged sword. On one hand, it ensures higher paychecks for workers to combat rising prices. Conversely, these rapid wage increments contribute to escalating inflation.
This predicament puts the Federal Reserve in a quandary. Persistent job openings and robust hiring could sustain economic growth and exacerbate inflationary pressure, potentially forcing the Fed to up the interest rates yet again, increasing the probability of a recession.
Moreover, several top-tier Federal Reserve officials this week suggested that they require more convincing evidence to halt interest rate hikes for the rest of the year.
While economists hold varied opinions on the future, many anticipate an unavoidable recession by year-end, pointing to softer consumer spending, declining business investment, and dwindling housing and manufacturing sectors.
“The recession is inevitable. It will come. And while millions could lose their jobs, this provides an excellent buying opportunity for fire sale assets. At least those fortunate enough to shore up dry powder,” asserts both Joseph Plazo and his partner, Mark Sullivan.
