Luck vs. History: The Cautiously Optimistic Bowtie Economist Explores Recession Probability
By Alexis Seeley
The Construction Association of Michigan (CAM) and the Home Builders Association of Southeastern Michigan (HBA) partnered to present the 14th annual Mid-Year Economic Forecast and State of the Industry Breakfast on Thursday, June 27th. The event is intended to provide a comprehensive overview of the impact of current and projected economic factors on the construction industry. Elliot Eisenberg, Ph.D., chief economist for consulting agency GraphsandLaughs LLC, presented the forecast to 300 attendees.
Economist Elliott Eisenberg anticipates that the U.S. economy will eventually enter a recession, although the exact timing remains uncertain. It is unlikely to occur this year, but current indicators suggest that it is on the horizon.
Known as the “Bowtie Economist,” Eisenberg’s voice has appeared in many publications, including Bloomberg, Business Week, Bureau of National Affairs, Forbes, and Fortune. He is also a member of the expert advisory board of Mortgage Market Guide and is a regular consultant to several large real estate professional associations, hedge funds, and investment advisory groups.
Eisenberg's forecast is based on an examination of various economic factors. By closely tracking inflation rates, job market statistics, and interest rate trends, the prediction aims to paint an accurate picture of upcoming economic conditions.
This year’s message echoes what Eisenberg shared in his 2023 forecast, where he predicted a recession would arrive before the start of 2024 - a variety of factors have delayed this outcome for more than a year.
The Interplay of Luck and History
The notion of luck as a potential disrupter to historical recession patterns was a recurring theme throughout Eisenberg’s presentation. Luck and history often correlate when it comes to predicting and avoiding recessions, according to Eisenberg. He discussed several instances throughout economic history where high interest rates did not lead to a recession due to “lucky” circumstances, such as loose fiscal policy (1964), low energy prices (1984), or the tech boom (1994).
“The historical data says the recession comes, but there's a lot of luck involved in this process and sometimes luck trumps history,” Eisenberg said.
Past economic cycles suggest a link between upward shifts in interest rates and subsequent economic downturns. Luck factors like strong car sales, robust construction, and pent-up demand can continue propelling the economy and help avoid a recession, at least in the short term.
Federal Reserve Pauses Interest Rate Hikes
One positive economic factor is that the Federal Reserve has stopped raising interest rates. Historical data shows that raising rates often leads to a recession.
According to Eisenberg, historical data shows that in 10 out of 13 instances of aggressive Federal Reserve rate hikes, a recession followed. Over the last few years, the Fed has raised interest rates substantially - Eisenberg argued they have gone "beyond any necessary reasonable point."
Higher interest rates risk slowing the economy too much, and he hopes the rates will be cut at least once before the year’s end, perhaps as soon as September.
Mixed Performance in the Construction Industry: A Sector-by-Sector Analysis
The construction industry is exhibiting mixed performance trends. Overall construction activity has recently leveled off, with some sectors experiencing decline while others see growth.
Public construction, particularly in transportation and educational facilities, is performing relatively well, backed by government infrastructure bills. Conversely, private construction is weaker, with commercial construction significantly struggling. Overall spending is either flatlining or declining, high interest rates are making financing commercial projects more expensive and difficult to obtain, and tightening credit access is making it harder to secure funding for these projects.
Manufacturing construction has experienced a significant boost, thanks to the CHIPS Act and the Inflation Reduction Act. Residential construction, although challenged by high interest rates, is performing better than anticipated under the circumstances.
Eisenberg cautions that rising inventory in single-family homes could pose a problem if interest rates do not decrease. Multifamily construction, described as being "in the trash can," is facing substantial difficulties.
Despite some bright spots, particularly in government-funded projects, the construction industry is grappling with challenges from high interest rates to economic uncertainty.
Inflation Continues to Decline
Inflation and interest rates tend to go hand in hand. As interest rates increase, inflation should decelerate. Eisenberg said to watch inflation because it is expected to fall to around 2% to 2.4% from its current 3.3% by the end of the year.
The decline can be attributed to several factors: supply chain issues from the COVID-19 pandemic have largely resolved, the effects of previous fiscal stimulus are diminishing, price surges in markets like automotive are cooling, among other influences.
Eisenberg emphasized that core inflation (excluding food and energy) is steadily decreasing, which is a positive sign for overall inflation trends. He advised monitoring inflation as it will influence the Federal Reserve's short-term decisions, while unemployment rates will shape long-term policy.
“If they see unemployment start to rise meaningfully, they fear ‘oh a recession’ and they'll start cutting interest rates,” he explained. “The problem is that by then, it's generally too late; so be careful.”
Slowing Job Growth and Rising Unemployment a Concern
A key takeaway from Eisenberg’s presentation is that job growth will slow and unemployment will rise, which is his biggest fear. The unemployment rate is currently at 4%, which has increased from 3.4%. Historically, when unemployment starts to rise, even slightly from its lowest point, it often signals an impending recession.
Eisenberg warns that if unemployment continues to rise to 4.2%, 4.3%, or 4.4%, it could be a strong indicator of economic trouble ahead.
The labor market is showing signs of weakening, as well. A decrease in the rate of people quitting their jobs suggests reduced confidence in finding new employment. The labor force participation rate is rising, increasing competition for jobs, which is contributing to a higher unemployment rate.
Currently, wage growth remains high at around 4.1%, but the Federal Reserve aims to manage this by trying to achieve a “soft landing” where inflation decreases without significantly increasing unemployment. As unemployment rises, it typically puts downward pressure on inflation by reducing consumer spending and wage growth.
Despite economic challenges, including elevated interest rates and rising unemployment, Eisenberg projects a reasonably good year ahead, with inflation continuing its downward trend. The 1.5% GDP growth rate should help prolong the onset of the expected recession.
Overall, the 2024 economic forecast presents a cautiously optimistic outlook with moderate GDP growth, controlled inflation, and potential Federal measures to maintain stability. The importance of monitoring key indicators like inflation and unemployment cannot be overstated, Eisenberg stressed, as they play a pivotal role in shaping economic policy and ensuring long-term health.
The Mid-Year Economic Forecast and State of the Industry Breakfast was made possible through generous sponsor support. Platinum sponsors for the 2024 event were D.A. Alexander, Doeren Mayhew, Guy Hurley Insurance & Surety Services, Lazear Capital Partners, LMCU, Michigan.com, MotorCity Floors and Coatings, and T-Mobile. Gold sponsors included CG Financial Services, HomePros Guide, Operating Engineers Local 324, Testing Engineers & Consultants, Inc., and VTC Insurance Group. Before the breakfast presentation, attendees jumpstarted their morning by connecting with colleagues and exploring 24 informative exhibits.
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Elliot Eisenberg, Ph.D. is an internationally acclaimed economist and public speaker specializing in making the arcana and minutia of economics fun, relevant, and educational. He earned a B.A. in economics with first-class honors from McGill University in Montreal, as well as a Master's and Ph.D. in public administration from Syracuse University. Eisenberg, a former Senior Economist with the National Association of Home Builders in Washington, D.C., is the creator of the multifamily stock index (the first nationally recognized index to track the total return of public firms principally involved in the ownership and management of apartments), the author of more than eighty-five articles, serves on the Expert Advisory Board of Mortgage Market Guide and is a regular consultant to several large real estate professional associations, hedge funds, and investment advisory groups. He has spoken to hundreds of business groups and associations, often as a keynote speaker. Learn more at https://econ70.com.