Moody’s Analytics chief economist Mark Zandi said the United States still has a “fighting shot” at avoiding an economic downturn, in an evening town hall meeting on March 29.
Zandi testified in the House Budget Committee hearing on the expanding federal debt earlier the same day.
“I think we have a fighting shot to get through the next 12, 18, 24 months, it’s gonna be difficult, I think it’s gonna feel uncomfortable at times, but I think we’ll be able to get through without an outright economic downturn,” Zandi said in the virtual town hall meeting, hosted by representative Mike Thompson of California’s 4th Congressional District.
Zandi said, “Despite all of the challenges that we face, the banking crisis, the high inflation, which is obviously still painfully high, [and] the higher interest rates, the economy is showing amazing resilience.”
Noting that layoffs in the job market are limited, the economist added, “Businesses just simply do not want to lay off workers, tech sector aside.”
“In the technology sector, there have been a lot of layoffs, the big tech companies that hired very aggressively back in the teeth of the pandemic, and now they’re downsizing.” Zandi said. “Most of those tech workers are quickly finding jobs in other places; the demand for their skills from other companies is very high.”
“Hard to imagine an economy that goes into recession without layoffs,” Zandi said, indicating that people didn’t lose faith in the economy.
Currently, the U.S. economy faces a looming debt ceiling, which has been accelerated due to banking turmoil, slowing down the economy. In January, the national debt reached $31.6 trillion, the largest dollar amount in history and the largest percentage of the nation’s gross domestic product since World War II.
Moody’s estimated the Treasury Department will run out of cash on Aug. 18.
“I don’t think it’s hyperbole to say that it would be cataclysmic,” Zandi said.
“You could potentially kick the can down the road on the debt limit until the end of the fiscal year, which is the end of September.
“There are a lot of other scenarios,” Zandi added. “Passing a piece of debt relief legislation has got to be extraordinarily difficult, and requires some pretty graceful lawmaking.”
Bay Area Housing Market in Recession
In the Bay Area, house prices are the hardest hit in the country, down at least 10 percent from last summer’s peak level. In San Francisco, house prices have dropped 14 percent, while San Jose and Napa are down 13 percent.Zandi said he would expect further price weakness across the country, particularly if mortgage rates settle in around 5.5–6 percent. “We’ve got to see that the housing market is in recession.”
“The economy itself is not, still growing, moving forward,” Zandi added.
“But the housing sector, the single-family housing sector, is the weakest because of its sensitivity to interest rates.”
He predicted “some house price declines and probably we’ll see some more here over the next 6 to 12 months.”
Zandi also noted “single-family construction has fallen pretty sharply” due to higher mortgage rates and the loss of demand, while multifamily construction has held up and will continue being the case through the middle of fall this year.
That is because the banking crisis induced tightening of underwriting standards, according to Zandi. “We’re going to see a lot less construction and land development lending by small and mid-sized banks that are key to smaller single-family home builders.”
“I fear that, a year from now, two years from now, our housing shortage is even going to be more severe than it is today,” Zandi said.
The Worst of Banking Crisis Is Over
Referring to the banking crisis in the town hall meeting, Zandi said, “The worst is over.”“I wouldn’t be surprised if there’s another failure or two just given the pressures the banking system is under … but I think that at this point, that won’t lead to systemic problems,” the economist added.
San Jose State University assistant professor Matthew Faulkner was more cautious.
“The immediate mania, hysteria, and panic of the SVB saga has calmed considerably,” Faulkner told The Epoch Times. “Yet, there is still a lot of work being done to understand what happened, why, and what steps could have possibly been taken to have these occurrences be seldom occurrences.”
Faulkner agreed that the overall financial system in the U.S. is considerably sound.
Following the banking crisis, Zandi said banks, especially small or mid-sized banks, would turn more cautious, and are going to raise their lending and underwriting standards.
“It will have an impact on consumer spending, on people’s ability to buy homes, buy cars, and businesses’ ability to go out and expand and hire and do all the things that are necessary to keep the economy going forward,” Zandi said.
The banking crisis in March caused both Silicon Valley Bank and Signature Bank in New York City to go bankrupt. The FDIC, U.S. Treasury, and Federal Reserve together took aggressive action to ensure or guarantee all depositors—not only accounts within the $250,000 limit, but also accounts exceeding the limit.
But Faulkner said that guaranteeing all depositors is most probably a one-off moment to solidify the banking system from mania and panic. He recommended individuals to open multiple accounts once exceeding the $250,000 limit, instead of counting on FDIC insurance.
