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- A recession threatens to pummel households, businesses, and the stock market.
- Piper Sandler's Nancy Lazar warned of tighter credit and the full fallout from the Fed's rate rises.
- Unemployment has jumped in 19 states, making a national recession almost inevitable, Lazar said.
Get ready for a recession that hammers consumers, squeezes companies, and drags down stocks, a veteran economist warned.
"There is a very high probability of a recession," Nancy Lazar, Piper Sandler's chief global economist, told WealthTrack in a recent interview.
Lazar, a cofounder of Cornerstone Macro and ISI, cited the delayed impacts of the Federal Reserve's interest-rate rises and credit drying up as two likely drivers of a downturn.
"We just think this is a very risky economic environment," she said. "When banks are tightening lending standards, and you clearly have higher interest rates, you've never had a soft landing. You've always had a hard landing."
Recessions strike an average of 10 quarters after the Fed begins a rate-hike cycle but have arrived up to 16 quarters later, Lazar said. The first hike of this cycle was in March 2022, meaning eight quarters have already elapsed.
Lazar highlighted several signs of economic trouble. She noted that 19 US states — accounting for 40% of national GDP — had recorded at least a 0.5 percentage point increase in their average unemployment, measured over three months.
In the past, whenever that many states recorded significant increases in joblessness, there was a nationwide recession, she said.
Government figures show unemployment rose in 30 states in the 12 months through April. The national unemployment rate was 3.9%, up from 3.4% in April 2023.
Several parts of the economy are "really, really struggling," Lazar said. She pointed to the NFIB survey of small-business sentiment, saying it was "very deep in recession territory" and worse now than in the 1990 and 2001 recessions.
Meanwhile, lower-income consumers are dealing with slowing wage gains and inflated prices, Lazar said. Their credit-card balances are "through the roof," and subprime auto delinquencies recently hit a record high, underscoring their financial woes.
'Tipping point'
In stark contrast, wealthy people are sitting pretty, with the value of their stock portfolios and homes near record highs. They've been able to retain their cheap mortgages and largely escape steeper rates as they have few high-interest loans, Lazar said.
"We have a very bifurcated economy, unstable economy," she added.
As for middle-income consumers, they're "at the tipping point" because if unemployment climbs above 4%, they could find themselves jobless with huge amounts of credit-card debt, Lazar said.
Given those warning signs, she predicted corporate revenues would weaken by the last three months of this year as consumers pulled back and interest rates bit, which would fuel layoffs and smack middle-income households.
Stash of cash
Lazar also said that an economic slump would batter stocks.
"If we have a recession, inflation will slow," she said. "And if inflation slows, you're going to squeeze profit margins. And that creates risks for the stock market."
If inflation proves stubborn and the Fed is forced to keep rates high, that could exacerbate the rise in joblessness and worsen the economic pain, Lazar said.
"A little stash of cash may not be a bad idea right now," she said. "I'm not sure in my 40-year career I've ever really said that."