Citi Chief Economist Says Brace for a Hard Economic Landing

Since late last year, a soft landing has been the increasingly popular prediction for the economy. Even the Federal Reserve has been clear.

But not everyone agrees. Particularly among some of the biggest banks in the world, where the thought is that a recession is more than likely. JPMorgan Chase CEO Jamie Dimon in March said he thought the odds of a recession were 65%. And now, Citi Chief U.S. economist Andrew Hollenhorst has come out to say he sees a hard landing coming up, with a prediction that the Fed would have to make four rate cuts, according to Fortune.

Belief in the likelihood of a soft landing — in which the economy slows but without falling into recession and employment stays strong — has never been uniform. In its last poll of its members, the National Association of Business Economics said that 25% still thought a recession was possible.

But as signs have been turning, the confidence in a soft landing has been getting shakier. When the productivity numbers came out for April, some saw it as additional trouble. “Productivity growth wasn’t strong enough to significantly mitigate the rise in wages last quarter as unit labor costs rose a robust 4.7%,” Nationwide Financial Markets Economist Oren Klachkin wrote in a note on May 2. “The strong rise in unit labor costs is another in a string of recent data points indicating that inflation pressures remain relatively high.”

“Analysts said the first-quarter results don’t on their own disrupt what has been a core reason for optimism that the U.S. was heading for a ‘soft landing’ in which inflation would return to the Fed’s 2% target without the sort of sharp rise in joblessness associated with past battles against rising prices,” Reuters wrote. “But it also keeps alive the question of how much the Fed can count on additional improvement in the economy’s ability to supply goods and services to help in the inflation fight, and how much will now rest on curbing demand — potentially dealing a blow to employment in the process.”

Hollenhorst is more direct. “We’re in the higher-for-longer stage of the policy cycle,” he said in an interview on Bloomberg TV. “The next stage of the policy cycle is a weakening of the labor market. Once it starts gradually weakening, it then weakens more sharply. I think that’s exactly what’s playing out now.”

The jobs number for April hit 174,000, well below the 233,000 increase that economists predicted. Hollenhorst said the fall in hours worked and number of full-time jobs were further signs of economic weakness.

There is a potential good news for CRE if Hollenhorst is completely right. Rate cuts that might be necessary to battle inflation — the existence of which would add costs — would lower interest rates, allowing easier financing and refinancing.