Mark Zandi Says 'We’re Not Even Close' to Being in a Recession

Too many important key metrics are signaling positively for the US economy and “we’re not even close” to being in a recession right now,” Mark Zandi, chief economist, Moody’s, shared during National Multifamily Housing Council’s 2022 Fall Meeting in Washington, D.C., last week.

“When you look at the high job creation numbers, record lows in job layoffs, the elevated number of unfilled positions, the high ‘quit rate’ by workers because they are looking and finding other higher-paying jobs and consider that recent GDP figures are likely to be revised higher, it’s hard to think we’re in a recession.”

He added that the average homeowner is holding about $185,000 in equity, compared to a more typical recent figure of $140,000 and that banks and state and local governments are flush with cash.

The federal government’s finances are the only thing that is truly unhealthy right now, but it’s got a AAA rating so it’ll be just fine.

Receding gas prices should bring the inflation reading down and he expects inflation to fall from about 8.5% to 4% by the end of 2023.

He said he’s less confident about declaring that a recession is not inevitable because some metrics are “uncomfortably high” such as US Treasury bill spreads.

“But, most likely, we’ll avoid it because consumers are showing so much strength and still have a lot of cash sitting in their personal bank accounts,” he said. “If we do have one, it will be a mild one.”

The Fed’s ‘Dark Irony’

He also shared thoughts on how rising interest rates are affecting housing choice and affordability.

The cost of owning a home is rising dramatically. A 30-year fixed mortgage at the start of the year is $1,300 is up to $2,000 now “just because of interest rates,” he said. “This leads to a healthier rental market with rising rents (though they have stabilized very recently) because people are sticking to renting.”

However, “in a rising interest-rate environment, construction volume is reduced so supply remains down and that makes the housing situation worse,” Zandi said. “You’re even seeing in some cases that homebuilders are mothballing home development projects.”

Keep in mind, he said, the Fed is raising interest rates in an effort to bring inflation rates down potentially, and rent is a key component of the Consumer Price Index (CPI).

“It’s darkly ironic that the Fed is doing this,” Zandi said, “The Fed is telling us, ‘We have to raise interest rates,’ but this is complicating the situation significantly because now many are having a harder time affording to pay rents. This has or will cause ‘demand destruction’ and people will soon have to begin dipping into their bank accounts.”

Demand destruction is a permanent or sustained decline in the demand for a certain good in response to persistently high prices or limited supply.

“What could turn all of this around is energy prices, and if they are affected by a Category-5 hurricane shutting down some refineries, the European Union’s price caps on energy prove ineffective, or a high-strength COVID variant re-emerges this fall or winter,” Zandi said.