For investors, getting a sense of the economic outlook is central to any effective investment strategy. So the speech by Danny Blanchflower, economics professor at Dartmouth College in New Hampshire, at the PLSA’s investment conference, with its prediction of dark times ahead, is highly pertinent.
“In the US, markets have been calling a recession for some time,” he said. “It just looks like this recession is delayed.”
In what Blanchflower called the ‘economics of walking about’, he said what people and markets are doing and saying are real bad signs for the US – and the global – economy. “People have stopped buying things on Amazon, stopped buying cars, fridges and so on – but they are going to Broadway shows.”
In many US inner cities, there is a real decline in consumption. For example, in San Francisco it is 31% of what it was pre-pandemic, and in most cities throughout the US it is around 50%.
“The big deal also is that US office vacancy rates are very high,” Blanchflower added. “The evidence is that banks are hugely exposed to the commercial real estate decline in prices. So that is a big deal coming. As banks will be in trouble because of it.”
He then added: “The biggest number that tells you are in an actual recession is whether the unemployment rate ticks up by [0.3%] in a single month. That happened last Friday. So that suggests the US has gone into recession.”
Blanchflower said that between now and the end of 2024, the Fed is going to cut interest rates nine times. The first will be in September. But he said this doesn’t matter. “The market is already pricing that in. So the Fed cuts, but the cuts do nothing because the market thinks inflation is coming down and they think the Fed will cut.”
The UK picture is equally as bleak. Blanchflower noted that the Bank of England forecast over the next three years is for no growth at all. But that is only part of the problem. “The market doesn’t trust the Bank of England. There is complete incoherence,” he warned.
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