Elon Musk on Economy: ‘Stormy Weather’ for Next 12 Months

Tesla CEO Elon Musk and his security detail depart the company’s local office in Washington on Jan. 27, 2023. Jonathan Ernst/Reuters

Tesla CEO Elon Musk expects the U.S. economy to endure a period of “stormy weather” over the next year amid a blend of higher interest rates, tighter lending conditions, and layoff concerns. The latest reports from the first-quarter earnings season and the Federal Reserve’s “Beige Book,” a monthly report of business survey responses, might support his prognostication.

Tesla shares fell by about 4 percent in after-hours trading on April 19 after the electric vehicle maker released its first-quarter earnings report. The company reported per-share earnings of 85 cents, matching market expectations. It also recorded $23.33 billion in revenue, topping estimates of $23.21 billion. However, profit slumped by 24 percent year-over-year to $2.51 billion, below expectations of $2.6 billion.

Shares sank almost 10 percent during the April 20 session.

But for observers, much of the focus was on what Musk had said during the question-and-answer portion of the earnings call, particularly his expectations for the broader economy.

While he refrained from alluding to a recession, he said the economy is going through “uncertain times.” Whenever there’s uncertainty in the marketplace, the “natural human reaction” is to delay a major purchase, especially when consumers are reading news of layoffs, he noted.

Each time the Federal Reserve raises interest rates, it’s the “equivalent to increasing the price of a car,” exacerbating price pressures for automobiles and what customers can afford, he said.

Musk thinks the economy will go through a rough patch for the next year and recover by next spring, although he conceded that was pure speculation.

“Stormy weather for about 12 months and then, provided there are no major geopolitical wildcards that show up, that things start getting sunny around spring next year,” he said.

Musk has repeatedly rung alarm bells surrounding the health of the U.S. economy and financial system.

While speaking in a recent interview with Fox News host Tucker Carlson, Musk described the economic landscape as being in “a dire situation,” noting that the solution to limit the damage would be “for the Fed to lower the rate.”

“It does seem like we’re headed into a recession here in 2023,” he told the “All-In Podcast” in December 2022. “My best guess is that we have stormy times for a year to a year and a half, and then dawn breaks roughly in second quarter 2024.”

The latest credit-related numbers do suggest that some level of tightening is unfolding.

Credit Conditions

The overall U.S. economy has held steady in recent weeks. Still, companies nationwide have reported banks tightening their lending standards since the banking turmoil last month, according to the latest Federal Reserve survey.

“Lending volumes and loan demand generally declined across consumer and business loan types,” the Fed stated in its Beige Book, published on April 19. “Several districts noted that banks tightened lending standards amid increased uncertainty and concerns about liquidity.”

Consumers are also expecting a more challenging environment for accessing credit.

The Federal Reserve Bank of New York’s Survey of Consumer Expectations found that more than 58 percent of households say it’s harder to obtain credit than a year ago, and nearly 53 percent think it will be more difficult to access credit a year from now.

While the banking system remains “sound and resilient,” New York Fed Bank president John Williams told a Money Marketeers of New York University event that the latest developments will result in “some tightening in credit conditions for households and businesses, which, in turn, will weigh in spending.”

“It is still too early to gauge the magnitude and duration of these effects, and I will be closely monitoring the evolution of credit conditions and their potential effects on the economy,” he said.

Fed Chair Jerome Powell told reporters at the post-Federal Open Market Committee (FOMC) policy meeting press conference that the aftermath of the Silicon Valley Bank and Signature Bank failures could trigger a credit crunch that would have implications for the broader economy.

“It could easily have a significant macroeconomic effect, and we would factor that into our policies,” he said.

Central bank economists predicted a “mild recession” later this year because of the banking turmoil, according to minutes from the March FOMC meeting.

Forward Guidance

According to a recent FactSet report, S&P 500 companies reported an aggregate year-over-year earnings fall of 6.5 percent during the first-quarter earnings season. This represented the biggest drop since the second quarter of 2020 and was the second consecutive quarter the index saw a decrease in earnings.

“Given that most S&P 500 companies report actual earnings above estimates, what is the likelihood the index will report an actual decline in earnings of -6.5 percent for the quarter?” John Butters, vice president and senior earnings analyst at FactSet, wrote in the report.

But market analysts assert that it isn’t so much about what happened in the first quarter. Instead, investors are assessing forward guidance and what’s being said about the April–June period. The post-Silicon Valley Bank developments occurred toward the end of the first quarter, so traders fear that the worst is yet to come.

Earlier this month, Butters noted that more than 100 S&P 500 companies had issued negative earnings-per-share (EPS) guidance in the first quarter, the highest number since the July–September span of 2019.

Johnson & Johnson, for example, beat adjusted earnings and revenue expectations and raised its full-year guidance. However, shares have tumbled by more than 2 percent this week after it published negative forward guidance for its pharmaceutical business.

An American Express credit card in New Orleans on Aug. 11, 2019. Jenny Kane/AP Photo

American Express disappointed investors, as the company braces for credit card debt struggles. The credit card provider reported earnings of $2.40 per share, down 12 percent from the same time a year ago. This was also below the market forecast of $2.66 per share.

“Our customers have been resilient thus far in the face of slower macroeconomic growth, elevated inflation, and higher interest rates, with credit performance remaining best-in-class,” Stephen J. Squeri, Amex’s chairman and CEO, said in a statement. “That said, we’re mindful of the mixed signals in the external environment.”

American Express shares slumped by about 1.5 percent following the earnings update.

But it’s not all bad news, according to Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“The good news is [that] the expectations are driven by conversations with corporate executives which love sounding pessimistic so that when the results come in better than expected, the market reaction could be positive despite soft results,” she wrote in a note.

That said, looking ahead, Comerica Wealth Management Chief Investment Officer John Lynch forecast that EPS will be flat for the companies in the S&P 500 this year. However, if bank lending becomes more restricted and puts pressure on output, “a more severe recession could potentially take EPS down ... for 2023.”

Credit conditions might further deteriorate after next month’s Fed policy meeting. Investors widely anticipate that the rate-setting committee will pull the trigger on one more quarter-point rate increase, lifting the benchmark policy rate to a target range of 5 percent to 5.25 percent.